NEW YORK – If you give me money that I have to pay you back with interest, we can both agree that the transaction in question is not aid or a grant. But can you call it an investment? Strictly speaking, the answer is yes, because the term investment has a broad definition. The agreement is, however, probably best characterized as a loan.
Still, you might argue that since nobody else was willing to lend to me, your act should be considered one of magnanimity—and you may well be right. But now let us add another dimension: suppose you say that the money you have lent me can only be used to buy materials from a shop owned by your friend. Is this still a magnanimous transaction now?
The first rule of foreign aid is that it is always designed foremost for the benefit of the donor country, yet in China’s case, most of the $46 billion to be spent on China-Pakistan Economic Corridor is not even aid and is still somehow largely designed to favour Chinese interests above any others. This is especially true of the $28 billion worth of power projects that have been lumped into the “early harvest” section of CPEC even though they have nothing to do with transportation infrastructure.
When all is said and done, less than $6 billion of the $46 billion figure that is often bandied about is anything that can be characterized as aid from China. And given the fact that most of the spending is spread out over a decade and a half, the annual amounts average out to relatively minuscule numbers.
Of course, it is absolutely vital for Pakistan to invest in its energy infrastructure, so one might argue: what does it matter that the Chinese investment in power in Pakistan is basically a loan? At least we will get the electricity we need and build our infrastructure up to levels that can fuel future economic growth. Maybe that is true (but not really—more on that below), but understanding the structure of the transaction matters. Pakistanis have a habit of prostrating ourselves before Beijing and giving them far more than we get in return because we consistently overestimate their generosity.
So let us take a look at the CPEC power projects. By now, it is well known that the vast majority are coal-fired power plants. While some have equity investors from China, the vast majority of the people who will actually own those power plants are Pakistani businesses and even some publicly listed companies that you may be a shareholder in.
Of the $28 billion in power projects, about 80% is debt financed, mostly through Chinese banks funding the construction of coal-fired power plants using Chinese equipment. Why Chinese banks and Chinese equipment? Because coal is so backward and reviled an energy source that nobody makes the equipment any more and no self-respecting bank in the world will finance it any more.
That 80% debt financing will be owed by the companies setting up the power plants so this is not public debt that is being incurred. However, it is backed by a sovereign guarantee from the Government of Pakistan and thus does create some liabilities for the government.
It will be repaid by the companies that borrow the money by selling electricity to us as consumers. The National Electric Power Regulatory Authority allows power generation companies to build in debt repayment as a cost that is part of the tariffs they charge consumers.
There is nothing wrong with this, of course. That is how power plants get built and paid for in the first place. But I do not remember anyone falling to their knees in gratitude to the Kot Addu Power Company the way people are groveling at the feet of the Chinese government out of gratitude for CPEC power projects.
From a political perspective, it is probably important for Pakistanis to remember that these are first and foremost commercial transactions. It is good that they are taking place, and the parties involved probably have reason to celebrate, but gratitude to Beijing is unwarranted.
Then there is the matter of the economic impact of these power projects. When it comes to building a power plant, it is important to remember that the plant has an expected life of between 20 and 25 years. Hence, one has to take into consideration the pace of expected technological change over the next two or three decades. This is always a risky enterprise, but a good first step is to usually not sink money in technology that is already considered obsolete by the world at large, such as a coal-fired generator.
There is no question that Pakistan needs electricity and lots of it over the next several decades. But making Pakistan dependent on imported coal (Thar Coal has limited use) at a time when coal mines around the world are shutting down and even the largest coal mining companies in the world are going bankrupt seems somewhat of a foolhardy way to invest in generating the electricity that we will be needing.
This massive $28 billion investment is being made by the government on a faulty assumption: that Pakistan has rolling power outages every day because we do not have enough capacity to generate electricity. While it is true that Pakistan needs to keep on rapidly expanding our ability to generate electricity, the real reason power projects have not been coming online is because there is rampant theft of electricity which makes it difficult for both the state-owned and privately owned power companies to collect the bills for the full amount of electricity they generate today. Why invest in building more when even what you have now is being stolen?
The problem for Pakistan’s power sector was never a lack of willing investors. It was a lack of confidence in the government’s ability to enforce the rule of law. The full Army brigade for security notwithstanding, CPEC does absolutely nothing to change that. We do not need tanks and armored personnel carriers patrolling our highways. We need policemen on our streets taking down the kundas.
Farooq Tirmizi is an investment analyst based in New York
Still, you might argue that since nobody else was willing to lend to me, your act should be considered one of magnanimity—and you may well be right. But now let us add another dimension: suppose you say that the money you have lent me can only be used to buy materials from a shop owned by your friend. Is this still a magnanimous transaction now?
The first rule of foreign aid is that it is always designed foremost for the benefit of the donor country, yet in China’s case, most of the $46 billion to be spent on China-Pakistan Economic Corridor is not even aid and is still somehow largely designed to favour Chinese interests above any others. This is especially true of the $28 billion worth of power projects that have been lumped into the “early harvest” section of CPEC even though they have nothing to do with transportation infrastructure.
Of the $28 billion in power projects, about 80% is debt financed, mostly through Chinese banks funding the construction of coal-fired power plants using Chinese equipment. Why Chinese banks and Chinese equipment? Because coal is so backward and reviled an energy source that nobody makes the equipment any more and no self-respecting bank in the world will finance it any more
When all is said and done, less than $6 billion of the $46 billion figure that is often bandied about is anything that can be characterized as aid from China. And given the fact that most of the spending is spread out over a decade and a half, the annual amounts average out to relatively minuscule numbers.
Of course, it is absolutely vital for Pakistan to invest in its energy infrastructure, so one might argue: what does it matter that the Chinese investment in power in Pakistan is basically a loan? At least we will get the electricity we need and build our infrastructure up to levels that can fuel future economic growth. Maybe that is true (but not really—more on that below), but understanding the structure of the transaction matters. Pakistanis have a habit of prostrating ourselves before Beijing and giving them far more than we get in return because we consistently overestimate their generosity.
So let us take a look at the CPEC power projects. By now, it is well known that the vast majority are coal-fired power plants. While some have equity investors from China, the vast majority of the people who will actually own those power plants are Pakistani businesses and even some publicly listed companies that you may be a shareholder in.
Of the $28 billion in power projects, about 80% is debt financed, mostly through Chinese banks funding the construction of coal-fired power plants using Chinese equipment. Why Chinese banks and Chinese equipment? Because coal is so backward and reviled an energy source that nobody makes the equipment any more and no self-respecting bank in the world will finance it any more.
That 80% debt financing will be owed by the companies setting up the power plants so this is not public debt that is being incurred. However, it is backed by a sovereign guarantee from the Government of Pakistan and thus does create some liabilities for the government.
It will be repaid by the companies that borrow the money by selling electricity to us as consumers. The National Electric Power Regulatory Authority allows power generation companies to build in debt repayment as a cost that is part of the tariffs they charge consumers.
There is nothing wrong with this, of course. That is how power plants get built and paid for in the first place. But I do not remember anyone falling to their knees in gratitude to the Kot Addu Power Company the way people are groveling at the feet of the Chinese government out of gratitude for CPEC power projects.
From a political perspective, it is probably important for Pakistanis to remember that these are first and foremost commercial transactions. It is good that they are taking place, and the parties involved probably have reason to celebrate, but gratitude to Beijing is unwarranted.
Then there is the matter of the economic impact of these power projects. When it comes to building a power plant, it is important to remember that the plant has an expected life of between 20 and 25 years. Hence, one has to take into consideration the pace of expected technological change over the next two or three decades. This is always a risky enterprise, but a good first step is to usually not sink money in technology that is already considered obsolete by the world at large, such as a coal-fired generator.
There is no question that Pakistan needs electricity and lots of it over the next several decades. But making Pakistan dependent on imported coal (Thar Coal has limited use) at a time when coal mines around the world are shutting down and even the largest coal mining companies in the world are going bankrupt seems somewhat of a foolhardy way to invest in generating the electricity that we will be needing.
This massive $28 billion investment is being made by the government on a faulty assumption: that Pakistan has rolling power outages every day because we do not have enough capacity to generate electricity. While it is true that Pakistan needs to keep on rapidly expanding our ability to generate electricity, the real reason power projects have not been coming online is because there is rampant theft of electricity which makes it difficult for both the state-owned and privately owned power companies to collect the bills for the full amount of electricity they generate today. Why invest in building more when even what you have now is being stolen?
The problem for Pakistan’s power sector was never a lack of willing investors. It was a lack of confidence in the government’s ability to enforce the rule of law. The full Army brigade for security notwithstanding, CPEC does absolutely nothing to change that. We do not need tanks and armored personnel carriers patrolling our highways. We need policemen on our streets taking down the kundas.
Farooq Tirmizi is an investment analyst based in New York