Don’t let CPEC become the Suez Canal

Is CPEC a chance to transform Pakistan's economic competitiveness? 

Don’t let CPEC become the Suez Canal
There is no question about the importance of the China-Pakistan Economic Corridor (CPEC) to the Pakistani nation. This grand endeavor will create millions of direct and indirect jobs, lift infrastructural limitations on the economy, especially in energy deficiency and strengthen export potential. When we invest in infrastructure projects of this size and magnitude, there is no doubt that a number of jobs will be created. There will be direct, indirect and induced economic impact.

We can and should discuss every single detail of CPEC, obstacles to its execution, the optimal way to finance dozens of its projects, details of logistical arrangements, and intricacies of its economic and social impact. However, that is not the focus of this article. It instead I aim to explore CPEC’s potential to transform Pakistan in a way that boosts its competitiveness, or rather highlight what needs to be done to ensure that this “generational chance” is taken full advantage of.
If Pakistan has 40% illiterate people, how is it going to leverage CPEC to address that? Because unless you address this, investors sitting anywhere in the world will not come to your door unless they are getting a 34% return on equity and 14% on debt

When we did an economic analysis for Crossrail in the UK, it became clear that the economic impact would be $40b. The figure was quantified and people were absolutely committed to making it happen. I am sure you have done some analysis in Pakistan as well. You will know what CPEC’s impact will be on Pakistan’s economy. You know how much it will cost. I am sure you know the economic benefit as well. But that is only one part of the picture. Consider:

CPEC is fondly compared to the Marshall Plan, also known as the European Recovery Program, to finance the economic recovery of Europe between 1948 and 1951 after WWII. But the comparison is drawn more in a way that embodies a nation’s hope for a better tomorrow. We need to remember that the essence of the Marshall Plan was conceived by Germany, carefully directing Allied support into its assets under a wider economic revival plan. The investment that came to Germany was $12b in today’s money—it wasn’t bigger than the CPEC investment we are talking about now. But the Plan was not just meant for infrastructure; it was meant for capacity building and economic efficiency. More importantly, where the money would be invested was decided, not by the US, but by the Germans who thought about how it would unlock economic potential. We also need to remember that many infrastructure and logistical projects around the world, both old and recent, have failed to live up to the hype of their transformative expectations.

Keeping this in mind, it is important to baseline Pakistan’s economic and competitiveness positioning and see if it can achieve the transformative effect on its economy simply by efficiently executing CPEC. All things being equal, the answer is simply ‘no’. If we look at Pakistan’s GDP per capita compared to that of its regional economic competitors, the picture is not reassuring. Having said that, Pakistan with its 5,100 (2016 est.) GDP per capita is still above that of many of its less fortunate neighbours. But if we are to assume an additional 2% on forecasted GDP growth (assumed CPEC effect) until 2025, Pakistan’s position would still not change significantly within the regional ranking. All in all, it is likely to add from one to three percentage points on average to national GDP growth and that too depending on Pakistan’s ability to solve a number of non-trivial challenges caused by internal security concerns and possible counteractions of geopolitical “losers” of CPEC. Even if you achieve that two percent addition, economic growth in Pakistan will not be higher than that of India and Bangladesh.
Istanbul bought its first secondhand train from Germany in 1998 for its metro. They used that train to then get local economy and industry working together to create their own first train that went on the rails in 2014. Is there a vision to create local trains in Pakistan?

The picture is dimmer when we look at Pakistan’s competitive ranking according to the World Economic Forum, where it is positioned at 126 out of 140 countries globally, second only to Myanmar regionally, with countries less economically fortunate outpacing Pakistan in competitive rankings. Pakistan lags behind in innovation, education and macroeconomic environment. Despite a very strong domestic market and quality access to international markets with locally sourced goods, the competitiveness of the country is undermined by its low innovation capability, limiting infrastructure, the underperformance of the educational system and poor use of a talented workforce. If Pakistan has 40% illiterate people, how is it going to leverage CPEC to address that? Because unless you address this, investors sitting anywhere in the world will not come to your door unless they are getting a 34% return on equity and 14% on debt.

Without a shift in the paradigm, CPEC addresses only one key point: infrastructure. However, it won’t takes too much of an imagination to envision a scenario where the economy would outgrow CPEC-enabled infrastructure. In order to ensure that this “generational chance” is utilized, every decision by Pakistan on CPEC should be driven primarily by the need to cover its competitiveness gaps. Detailed design choices should ensure arrangements that favour development of certain industrial clusters rather than administrative convenience.

Enhancing ‘local content’ in CPEC-driven projects should be a priority. It will require a detailed strategy and plan for the short term during the construction phase and long term plans for which key industries could be established. For example, Pakistan is building metros, roads, a port but how much of that will be leveraged to induce local industry? Turkey is often cited here as an example. Istanbul bought its first secondhand train from Germany in 1998 for its metro. When we were advising the mayor of Riyadh on the 30 billion dollar metro rail project, we went to Turkey and met the mayor of Istanbul. He said that they used that German train to then get local economy and industry working together to create their own first train that went on the rails in 2014. They asked investors to first buy spare parts locally, then they got local universities to do R&D to build systems for trains. Then they said they would get builders and global companies to invest in Turkey, so they bought local, employed their people, and used their technology. Is there a vision to create local trains in Pakistan? One fantastic asset is the military whose knowledge and innovation could be leveraged for CPEC. Turkey is now exporting trains to Saudi Arabia. They exported to Lahore. This is the ambition that Pakistan should have because this is the only way CPEC will be transformative.

Then Pakistan should move into building capacity and ask who is going to lead this change? Is Pakistan ready to change its economic structure and institutional frameworks? Does it have institutions to take this forward? When someone is making a $57 billion investment they have to ask if they have the institutional capacity to manage it. Developing talent and labour market initiatives are critical to ensure CPEC delivers a sustainable impact on Pakistan. A focused communication plan, highlighting opportunities, skills requirements and downstream employment impact would be a good start. Aligning this with vocational training and wider education systems would deliver a balanced labour market for the future. This is how it is an absolute gamechanger.

Finally, Pakistan should think of interlinked choices, where to play and how to win. Where to play is the vision, the national narrative that says this is what we are going to do. What is going to be Pakistan’s export strategy on the back of this CPEC initiative? Pakistan doesn’t only want to consume Chinese goods? Is it going to use CPEC as an opportunity to build its industry?

Then, there is the question of where to play. This is going to be a key one in terms of regional competitiveness and in terms of cities competing and what they will be famous for and what infrastructure will be built around that.

For example, California decided that it did not want testing for driverless cars because of the accidents. So the governor of Arizona made it a point to stand on the border with California and wave those people in. He told them to do their testing in his state. Then he said he was going to use his legislative and regulatory environment to build that industry in Arizona and compete with other states in the US. So one question is, is Pakistan thinking about turning Gwadar city into the first proper smart city in the world?

Karachi and Lahore have legacy infrastructure, which is costly to replace. Can you build that from scratch in Gwadar? Can you go to companies that are struggling to test their new technologies because it is putting that technology on the back of legacy systems. Pakistan can invite them into Gwadar with a vision to be known as the first proper purpose-built smart city in the world. This is where you bring in your PhDs, you send people overseas to learn about smart cities. Take the example of Dubai that become the largest airport in the world for passenger traffic. When they announced the next one, Shaikh Mohammad said he did not want it to be the largest airport, but to become the global capital of aviation. He wanted to bring in R&D, different customer skills and technologies to become the global capital of aviation. Does Gwadar have an ambition?

There is a real danger of CPEC becoming the Suez Canal. There was a real potential for Egypt to transform on the back of it. Think big. Above all, there is a need to develop a national narrative around CPEC and communicate a compelling vision. These opportunities come once in a generation.

Rashid Bashir is a Partner and Public Sector leader for Deloitte in the Middle East. He is advising Middle East governments on large scale transformation initiatives. He started his career with the UK government as head of Policy and Economics for South East England Development Agency. He holds an MBA from Strathclyde Business School and an MPhil from Glasgow University.