Chinese FDI to Build Infrastructure, Alleviate Energy Crisis in Pakistan

China's state-owed banks will finance Chinese companies to fund, build and operate $45.6 billion worth of energy and infrastructure projects in Pakistan over the next six years, according to Reuters.

Major Chinese companies investing in Pakistan's energy sector will include China's Three Gorges Corp which built the world's biggest hydro power project, and China Power International Development Ltd.

Prime Minister Nawaz Sharif and President Xi Jinping

Under the agreement signed by Chinese and Pakistani leaders at a Beijing summit recently, $15.5 billion worth of coal, wind, solar and hydro energy projects will come online by 2017 and add 10,400 megawatts of energy to the national grid.  An additional 6,120 megawatts will be added to the national grid at a cost of $18.2 billion by 2021.

Total Foreign Direct Investment Source:  World Development Indicators 

Starting in 2015, the Chinese companies will invest an average of over $7 billion a year until 2021, a figure exceeding the previous record of $5.5 billion foreign direct investment in 2007 in Pakistan.

FDI As Percentage of GDP. Source: World Development Indicators

With over $7 billion a year, it will still, however, barely match the prior record of 3.75% of GDP set in 2007.

The biggest upside of this investment will be the generation of over 16,000 MW of additional electricity which should revitalize Pakistan's business and industry sectors and significantly boost its GDP.

The deal can be win-win for both if the Chinese companies coming in as independent power producers (IPPs)  enjoy significant returns of 17% to 27% a year on their investment while Pakistan actually alleviates the nation's crippling electricity crisis to get its economy moving again.  The assumption here is that Pakistan has learned from and corrected the prior mistakes in its existing cost-plus IPP contracts which guarantee significant profits to IPPs regardless of costs, efficiency and amount of power supplied to the grid.

Rapid increase in power generation is a well understood pre-requisite for accelerating industrialization and major improvements in productivity in this day and age. Pakistan needs sustained sharp focus on increasing electricity availability to improve productivity and living standards of its people.

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Riaz Haq said…
KARACHI: Foreign direct investment (FDI) increased by 47 per cent in the first four months of this fiscal year, mainly because of a big inflow from China.

The State Bank reported on Monday that the country received $423 million during July-October compared to $288m during the same period of last year.

The inflows posted a sudden increase in October, turning around a year-on-year fall of 26pc in July-September quarter to a 47pc rise in the four-month period.

Pakistan received just $169m as foreign direct investment in the first quarter. The inflows in October alone amounted to $252m.

However, the main inflow which changed the depressing situation was from China which invested $163m out of the total $423m. The government has been making efforts to bring Chinese investment in the country. Prime Minister Nawaz Sharif recently signed memoranda of understanding (MoUs) with Chinese companies for $42 billion investment here.

The United States and Hong Kong were other two countries who made significant investment of $75.2m and $74.6m, respectively.

Despite this sudden jump in October the overall situation is still unattractive since the size of FDI is extremely poor.

The overall FDI inflows and outflows during July-October were also surprising since both were very high in numbers. The inflows were $1.390 billion (112pc higher year-on-year) and outflows were $966m (up 163pc).

Portfolio investment in this period also showed positive sign increasing by 144pc to $176m compared to only $72m in the same period of last year. However, foreign portfolio fell by 143pc during the four months. It was $69m during the same period last year while this year it was negative $29m.

Pakistan has been waiting for more than seven years for improvement in the FDI but the country hit by terrorism could not convince the foreign investors so far. The FY14 was better with FDI inflows of $2.3bn than FY13 when the figure was $1.57bn.
Riaz Haq said…
The Karachi stocks market witnessed a bullish trend Tuesday as the analysts said investors’ sentiments were boosted by the inflation numbers which dropped to an 11-year low during November.

Easing consumer price index (CPI) inflation, which the analysts believe would clock in at six percent during fiscal year 2014-15, would pave the way for further monetary easing by the central bank in its monetary policy statement due in January next year. The analysts said the month’s CPI reading was lowest since November 2003 when the index had stood at 4.2 per cent.

Amid higher trades, Tuesday saw the KSE 100-share index gaining 381 points or 1.22 per cent to close at 31,680.72 points as against 31,299.72 points of Monday.

With intraday high and low, respectively, standing at 31,721.83 and 31,299.72, the trading volume at the ready-counter was recorded at 337.8 million shares, showing a growth of Rs 14 million shares when compared to 323.9 million of the previous trading session.

The day saw 397 scrips exchanging hands. Overall value of the stakes traded contracted to Rs 15.6 billion from Monday’s Rs 17.7 billion. Of the traded stocks, 258 gained value, 125 lost and 14 remained unchanged. The market capitalization rose slightly to Rs 7.2 trillion from Rs 7.1 trillion of the previous session. The free-float KSE 30-share index gained 288.61 points and ended at 20,636.17 points.

“Stocks closed high amid higher trades after CPI inflation stood 11 year low in Nov ’14 at 3.96pc (Year-on-Year),” viewed equity analyst Ahsan Mehanti.

Expectations for SBP discount rate cut, fall in NSS rates and easing political concerns after PTI altered dates for protests played a catalyst role in bullish activity at KSE, opined Mehanti, a director at Arif Habib Corporation.

Backed by declining international crude oil prices the CPI inflation in the country is considered to be a major determinant for the State Bank to decide its monetary policy which currently stands at 9.5 percent.

“The lower CPI indicates that further 50-100bps room is still available in SBP discount rate,” said Abdul Azeem, an analyst at InvestCap Research. The low interest rates scenario, the analyst said, would provide further impetus to the country’s equity market, particularly the leveraged sectors.

This is what exactly happened on Tuesday as equity analyst Mehanti said an oversold oil sector led the day’s rally followed by leveraged stocks in cement, textile and fertilizer sectors.

The list of 10 best performing scrips was topped by K-Electric Limited which counted 8.24 million of its listed shares as traded on the day. The utility’s stakes made a 0.2-paisa gain to close at Rs 8.26.

Others to follow were PIA with 26.1 million share trading, Summit Bank 13.9 million, Jahangir Siddiqui 13.1 million, TRG Pakistan 13 million, Bank Al-Falah 12.7 million, Azgard Nine 11.5 million, Engro Fertilizer 10.8 million, Maple Leaf Cement 9.9 million and Engro Foods 9.9 million shares.

“Coupled with likely improvement in forex reserves position, we expect higher cut in policy rate in 2015,” viewed analysts at Topline Research.

Another senior equity analyst Khurram Schehzad said: “there is a lot of value potential left to be topped at the country’s stocks market which stood the best performing equity market in November and the second best frontier market in CY14 to date.”
Riaz Haq said…
Pakistan, which is currently in negotiations with Qatar for liquefied natural gas (LNG) supplies, has opened its farm sector to investments from Qatar, which has placed utmost priority on food security.

Punjab province Chief Minister Shabaz Sharif invited investments in his meeting with the Qatari Businessmen Association (QBA), where both the sides discussed ways of enhancing trade co-operation and investment as parts of strengthening bilateral relations between the countries.

The meeting was also attended by Shahid Khaqan Abassi, Pakistan’s Minister of Petroleum and Natural Resources, and Shehzad Ahmed, Pakistan’s ambassador in Doha; while the QBA was represented by its chairman Sheikh Faisal bin Qassim al-Thani and other officials such as Nasser Sulaiman al-Haidar, Maqbool Habeeb Khalfan and Sarah Abdullah.

During his presentation, the visiting chief minister highlighted the investment opportunities available in Pakistan in different sectors, especially in electricity generation, and the energy sector in general.

Secretary of the Ministry of Petroleum and Natural Resources Abid Saeed had said last week that the Pakistani government was making arrangements to import 2bn cu ft of LNG per day in the next two years to meet energy needs.

The first LNG terminal would be completed by Elengy Terminal Pakistan Limited at the Port Qasim by the end of February next year, he said.

In addition to the energy sector, Pakistan, Sharif said, is also keen to attract investments in agriculture, which can strengthen Qatar’s food security programme.

The Qatar National Programme for Food Security, which was established in 2008, is aimed at developing a sustainable food security programme for Qatar by enhancing domestic agricultural production and strengthening the reliability of food imports from abroad.

Pakistan has been witnessing increasing interests in corporate farming, which has brightened the prospects for fresh investments in different areas of the sector in Punjab, Sindh and Khyber Pakhtunkhwa provinces.

QBA chairman Sheikh Faisal expressed the interest of Qatari businessmen to explore investment opportunities in Pakistan, particularly the transport and construction, electricity generation, and tourism and hotel sectors.

He requested the Punjab chief minister to provide QBA members with detailed studies of different projects available in Pakistan for investment as a preliminary step to organise a (business) delegation to Pakistan.

Qatar has signed a number of bilateral agreements with Pakistan, including an agreement on promotion and protection of mutual investments; an agreement to regulate the recruitment of Pakistani workers in Qatar; a memorandum of understanding between the Qatar Investment Authority and Pakistan regarding the establishment of an Islamic Bank and an insurance company; and an agreement to avoid double taxation and prevention of fiscal evasion.

Trade volume between Qatar and Pakistan reached $800mn in recent years compared to $450mn in 2006.

Pakistan’s economy depends mostly on the service sector, which constitute 53.1% of the GDP, followed by the agricultural sector which amounts for 25.3%, while the industrial sector amount for 21.6%.,-farm-investments
Riaz Haq said…
Excerpts From National Interest article by China critic Gordon Chang:

In early November in Beijing, Sharif signed Corridor pacts authorizing $45.6 billion in projects in his country. Of that total, $33.8 billion is allocated for electricity generation—the addition of 16,520 megawatts by 2021—and $11.8 billion for transportation infrastructure.

The November pacts follow those signed this February, when the two countries inked deals to improve the Karakoram Highway and build an airport in Gwadar, a port on the Arabian Sea near the Iran border. The February agreements in turn came on the heels of one signed last year, when China and Pakistan agreed to build a fibre-optic cable from the Chinese border to the city of Rawalpindi, next to Pakistan’s capital.

Chinese premier Li Keqiang called the Corridor, during his visit to Pakistan in May of last year, a “flagship,” and the ambitious undertaking is indeed a wonder to behold. The transport and communication links—roads, railways, cable, and oil and gas pipelines—will stretch 2,700 kilometers from Gwadar to the Khunjerab Pass, where the Karakoram Highway leaves Kashmir and enters China, not far from the Chinese city of Kashgar.

Moreover, Islamabad will establish special economic zones in the Corridor where Chinese companies will locate operations. Beijing, as Tarique Niazi of the University of Wisconsin observed, is trying to “integrate Pakistan into the Chinese economy by outsourcing low-tech, labor-absorbing, resource-intensive industrial production,” and the Corridor initiative makes it easier to transform the client state “into a giant factory floor for China.”

Beijing has obviously gone all-in on Pakistan. Sharif’s government will provide 15 percent of the financing for the cable to Rawalpindi, but almost all the rest of the Corridor projects will be on China’s tab. Pakistan does not have the money to pay for the large projects, and according to Khawaja Asif, Pakistan’s minister for water and power, Pakistan will not be incurring debt.

Beijing, it appears, will be providing almost all the funding, which means it will, one way or another, own resulting cash flows as the projects are supposed to be profit-making. Chinese companies will participate in the building of the infrastructure, and Chinese banks, especially the China Development Bank and Industrial and Commercial Bank of China, will be providing financing. The Beijing-sponsored Asian Infrastructure Investment Bank, when it opens its doors for business next year, will probably support Corridor projects as well. Sharif, therefore, should be worried that the tide of Chinese cash will effectively turn his country into Beijing’s newest colony.

For now, Beijing’s strategy is to build additional facilities in the port area so that it can then offload oil there and send it across the Himalayas to Xinjiang. On paper, the overland route eliminates the need to ship crude through the easily blocked Malacca Strait, but the Gwadar-Kashgar plan has its own vulnerabilities, especially at both ends.
Riaz Haq said…
The Sino-Pak Trade and Energy Corridor
-An AssessmentThe
8th Pan – European Conference on International Relations
Institute of International Relations
Warsaw Economic University, Poland

A more comprehensive account detailing the
strategies for six subregional trade and transport sector development up to 2040
focusing upon Central Asian is given in ADB (2012).
Table 1 Gwadar Deep Sea Port Construction Plan
Phase 1:2002,3,22~2005,3,23 (original date)
Beijing and Islamabad signed agreement in assisting Pakistan building the the Gwadar Deep-Sea Port
on 10 August 2001; construction work took place in May 2002 completed in December 2005. China
agreed to participate in the Phase-2 construction.
Budget:$250 million(14.9Rupee)
China provided $198 million , to be partitioned into
donation (18)、new development aid (31)、new
interest-free loan (31)、government preference loan
(58)、buyer’s credit (60)
Pakistan:$50 million
Manpower (personnels involved)
China:450 Pakistan:512
3 -multipurpose berths —each 200 meters long.
1 -RO-RO berth
1-100 meter service berth
4.7 km long approach channel dredged to 15.5 m inner harbour and 12.5 m outer harbour
Width of channel-206 m
Port Basin and Turning Area- 595 m diameter
Related port infrastructure and port handling equipment & pilot boats, tugs, survey vessels, etc.
The port, currently, has the capacity to handle 50,000 DWT bulk carriers and 25,000DWT
Designed by:The Fourth Harbour Engineering Investigation and Design Institute”
Implemented by : China Harbour Engineering Company Ltd. of CCCC
CCCC: China Communications Construction Company Ltd.
Phase-2: commence after Phase-1, expected to complete in 8~10Years
In 2007, Gwadar Port Authority (GPA) singed contract with the Concessional Holding Conpany
(CHC) of the Port Authorty of Singapore (PSP), CHC took over the construction and management
business of the operation of the Port duty-free and the FTZ for 50 years by adopting a BOT model
Budget:$524 million BOT、BOO
Berth for
Bulk carriers:1(up to 100,000DWT)
Bulk grain carrier: 1
Tankers:2 (up to 200,000 DWT)
Basic Installations:Warehouse and EPZ、Industrial site for crude storage/refinary/petrochemicals
Space for development:18,600 hectare, containing-Wharf (1,2 phases):400 hectare
-Export processing zone (adjacent to the East Bay):74 hectare
-Exclusive industrial site (city north):4,000 hectare
-Refinary units (NE of city with pipe linking with crude oil port terminal):1,000 hectare
-Residential area (city west, north to the Bay):400hectare
1. Corporate income tax: free for 20 years
2. Materials and equipments imported for port construction: duty free
3. Vessels and fuels:tax free for 40 years
4. Tax of Balouchistan and local government on CHC: none
5. Bonus:GPA and PSA are entitled to draw bonus out of both the annual commodity tax income
and port service fees (9%) and the FTZ revenue(15%)
1. Rana, Pervaiz Ishfaq (2007), “Government Indecisive on Role, Status of Gwadar Port,” Dawn
Feb., 6.
2. Sabri, Rabeah (2009), “Balochistan: Af- PAK’s forgotten Frontier,” May. 4.

Gwadar Port: On 20 March 2007, Gwadar port (Phase-1) was officially
inaugurated by President Pervez Musharraf, along with Chinese Minister of
Communication Li Shenglin, he promised a fourth port to be built at Sonmiani in
the Lasbela district. Once completed, it will rank among the world's largest
deep-sea ports and serve as the mother-port at the junction of traditional trade
routes opposite the Strait of Hormuz. The port began cargo handling from 15
March 2008. The first ship carrying 64,000 tonnes wheat from Canada docked
and unloaded, the largest vessel ever called at Pakistan.,%20An%20Assessment..pdf
Riaz Haq said…
KARACHI: The Export Processing Zones Authority (EPZA) was established in 1980 with the mandate to plan, develop and operate export processing zones (EPZs) in Pakistan. EPZA is an autonomous body working under the Ministry of Industries. It has a nine member board of directors, and is tasked with setting up EPZs in Pakistan.
EPZA as a system has worked well in Pakistan, especially in Karachi. As an already established, known and tried system for attracting investments and generating exports from Pakistan, it can provide almost risk-free economic uplift.
As an organisational concept, EPZA facilitates, promotes and provides business support to those who wish to set up their units in EPZs. Primarily, it is a service-oriented organisation for the promotion of exports from Pakistan. EPZA itself is not involved in physical business.
The main objectives of EPZA are to improve industrialisation through commercial and marketing activities, provide country-specific investment linkages on reciprocal basis and to simplify paperwork and transfer of technology through foreign investment. For a more holistic picture of what EPZA does, consider that it attracts foreign capital, sets up export-oriented industries, assists in acquiring sophisticated technology, transfer such technology to Pakistan, generates employment and skill development activities, boosts exports and foreign exchange earnings and increases import of raw material from Pakistan.
For businesses, EPZA provides developed land on highly competitive rates for 30 years lease. All zones are enclosed in a boundary wall with well-defined security parameters. EPZs enable business to import machinery, equipment and materials free of duty, while allowing them freedom from national import regulations and exemption from exchange control regulations. Repatriation of capital and profits is allowed to foreign investors, and there is no sales tax on input goods, including electricity and gas bills. Furthermore, duty-free vehicles are allowed under certain conditions
EPZs in Pakistan
Over a period of time, EPZs have been established in different places in Pakistan to develop the natural resources of these areas and to provide job opportunities to locals. Zones which are currently operational include those in Karachi, Risalpur, Saindak, Sialkot, Duddar, and the Tuwairqi Steel Zones in Gujranwala, Gwadar, Reko Diq and Khalifa Coastal.
Riaz Haq said…
The term special economic zone (SEZ) is commonly used as a generic term to refer to any modern economic zone. In these zones business and trades laws differ from the rest of the country. Broadly, SEZs are located within a country's national borders. The aims of the zones include: increased trade, increased investment, job creation and effective administration. To encourage businesses to set up in the zone liberal policies are introduced. There policies typically regard investing, taxation, trading, quotas, customs and labour regulations. Additionally, companies may be offered tax holidays.

The creation of special economic zones by the host country may be motivated by the desire to attract foreign direct investment (FDI).[1][2] The benefits a company gains by being in a Special Economic Zone may mean it can produce and trade goods at a globally competitive price.[1][3] The operating definition of an economic zone is determined individually by each country. In some countries the zones have been criticized for being little more than Chinese labor camps, where labor rights are denied for workers.[4][5]
Taking the example of the Chinese success with their SEZs, China is helping Pakistan develop the RUBA SEZ on the outskirts of Lahore. RUBA SEZ PVT LTD is a subsidiary of RUBA Group of Companies and was expanded from existing Haier – RUBA Economic Zone.

Other economic zones include the China-Pakistan economic zone open only to Chinese investors and also the future crown jewel of Pakistan, Gwadar.

There are also talks of creating a Japanese city for foreign investors from Japan only.

There has also been new SEZ proposed on the currently under construction Sialkot-Lahore motorway, Qatar has proposed an investment for $1 billion in a new SEZ along the motorway.

There is also a new zone under construction in Faislababd, which will be the biggest industrial estate of Pakistan when complete, it has sections for each country and the first phase is already complete with a special Chinese zone in it.

Special economic zones in Pakistan:

Karachi Export Processing Zone, Karachi, Sindh
Risalpur Export Processing Zone, Risalpur
Sialkot Export Processing Zone, Sialkot, Punjab
Gujranwala Export Processing Zone, Gujranwala, Punjab
Khairpur Special Economic Zone, Khairpur, Sindh
Riaz Haq said…
Brookings on economic and industrial corridors:

The two leaders (LeKiang and Sharif) agreed on the areas of cooperation in the near future under the framework of the Long-Term Plan for China-Pakistan Economic Corridor such as: start the China-Pakistan Cross-border Fiber Optic Cable project at an appropriate time, upgrade and realign the Karakoram Highway on a fast-track basis, explore cooperation on solar energy and biomass energy, explore construction of industrial parks along the Pakistan-China Economic Corridor, launch at an early date inter-governmental consultations to implement the Digital Television Terrestrial Multimedia Broadcasting (DTMB) in Pakistan, coordinate the commercial operation of TD-LTE in Pakistan, and enhance cooperation in the wireless broadband area. (APP 2013)

Economic corridors are meant to attract investment and generate economic activities within a contiguous region, on the foundation of an efficient transportation system. They are meant to provide two important inputs for competitiveness: lower distribution costs and high-quality real estate. The corridor approach for industrial development primarily takes advantage of the existence of proven, inherent and underutilized economic development potential within the region.
Apart from the development of infrastructure, long-term advantages to business and industry along the corridor include benefits arising from smooth access to the industrial production units, decreased transportation and communications costs, improved delivery time and reduction in inventory cost. The strategy of an industrial corridor is thus intended to develop a sound industrial base, served by competitive infrastructure as a prerequisite for attracting investments into export oriented industries and manufacturing. Table 1 provides a categorization of corridors in terms of their scope and economic impact. The most comprehensive form, the economic corridor integrates infrastructure development with the trade, investment, and other economic potentials of a set of specific geographical areas, while at the same time undertaking efforts to address social, environmental, and other potentially adverse impacts of increased connectivity.
Riaz Haq said…
Night view of a well-lit grid-station in #Lahore. It connects #Punjab to 878 Km 600 HVDC $2.1 billion Lahore-#Matiari (#Sindh) #power #transmission line that recently became part of #Pakistan's national grid. #CPEC #China

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