Understanding Chinese’ entry in Pakistani Market

on 19/07/2017

I think the prevalent questions in the minds of Pakistani society regarding CPEC are that what will be the consequences of Chinese entering the domestic market? Either they will occupy the whole market by monopolising it or they will compete fairly in the market or they will destroy our domestic manufacturing industry by pumping lower priced China-made products into the market?

In my opinion basic Economics can be a great help to cater all these questions and following points seem important in this regard. Is import good for our society or bad?

The answer to this question depends on our understanding of what does it mean for a product or service to be good or bad for a society? What are the needed attributes in a commercial product being sold in a market? Either it is the standard of living of the Pakistani citizens which matter or the so-called national prestige which becomes high when we see the products mentioning “made in Pakistan”?

If it is the standard of living which is valued then decrease in the price level escalates the standard of living of the people because it increases our purchasing power. For example, I have Rs20 and I need to buy bread for my daily meal. The price of one slice of bread is Rs5, so I will get four slices by paying Rs20. Supposedly, the price of one slice decreases to Rs4, what will happen then? In fact, I will be able to buy five slices. Now we again suppose that the price of a bread jumps to Rs7. Now, my purchasing power will be decreased and I will get only three slices of bread. So, the benefit of society is in low priced items. The fewer consumers will spend, the more they will save which result in more investment. If a consumer wants to spend all her disposable income, then she will buy more items (less in basic needs and more in luxuries).

Is foreign investment good or bad?

Foreign investment is always good for an economy. It increases the know-how in the society by inserting advanced knowledge and technology. Important thing is that workers learn new things from their repetition of tasks and from the innovative practices introduced by entrepreneurs or foreign firms. Similarly, when a foreign firm introduces new ideas and practices in the society, their employees learn from them, it increases the rate of entrepreneurship because some employees leave their job and start their own business which they have learned from their experiences.

Ricardo Hausman writes this in the following words:

“The key to [Progress) is tacit knowledge. To make stuff, you need to know how to make it, and this knowledge is, to a large extent, latent – not available in books, but stored in the brains of those who need to use it……new firms are formed mainly by workers who leave other successful firms, taking the relevant tacit knowledge with them. The reality is that people learn more by performing and repeating tasks, better than mere reading books in Academics.”

Remember that local businessman has more competitive advantage than a foreign one because he knows more about the local environment. Bangladesh’s textile industry is a beautiful case study in this regard which shows that foreign investment increases the comparative advantage of the local firms. It increases total production of the society. It creates more jobs and opens more opportunities for entrepreneurs which definitely increase the standard of living of the people.

More investments mean the pie of the economy enlarges. The economy is not a fixed pie. The new entries in the market do not mean that new entrants will disentitle local firms from their fair shares in the market. When Chinese businesses will enter the market, they will definitely search the opportunities in which they have more competitive advantage. While local businesses will search the opportunity in which they can contribute better than their Chinese competitors. Be confident that our business community has the potential to do it and foreign competition will further enhance it.

The important thing to be more concerned about CPEC is not the foreign competition but the term s and conditions of the deal, and the risk of monopoly if it is being granted by the state to the investors. We should keep our focus on the incentives being provided to them. Either they are coming to join us and compete with our local firms just like other foreign investors do or they will be treated differently from Pakistani investors with more privilege? There should be no special treatment or special incentives to any firm either it is local and foreign. The monopoly of any kind will destroy our economy, politics and society, and we will be in big trouble in future. We must be very careful and cautious by asking critical questions to the government on behalf of our civil society.

(The writer is an economist in a public policy think tank PRIME based in Islamabad).

ADB to continue support Pak infrastructure – road projects

on 17/07/2017

Asian Development Bank (ADB) Vice President Wencai Zhang said in July that the bank would release almost two billion dollars loan to Pakistan during ongoing financial year 2017-18. He said that currently ADB is disbursing around $1.5-$1.6 billion annually to Pakistan. However, the ADB is trying to do more, as the Bank would release nearly two billion dollars in the current fiscal year. The ADB would provide $6 billion to Pakistan under the three-year (2018-20) operation plan. The government of Pakistan is asking us to disburse $2.5 billion annually, said Vice President ADB, who is currently visiting to Pakistan to discuss ADB’s development partnership with the Pakistan’s economic team. He met with Finance Minister, Railways Minister, Planning and Development Minister, Water and power minister and chairman NHA. “In coming years we will continue to support projects and especially infrastructure and road projects as traditionally a lot of projects have been done,” Wencai Zhang said while talking to journalists. Wencai Zhang said that stable political situation in Pakistan is important for reforms and development of the country. Political stability is always important for the economic development of the country. “It will be the government of Pakistan to decide to approach IMF after the upcoming general election. However, the ADB would continue to help Pakistan in reforms in power sector and public sector entities after the general election,” he replied to a question. He appreciated the economic gains achieved by the incumbent government during last four years. He said that Pakistan had completed three years IMF programme, improved macroeconomic situation and achieving higher economic growth. However, he emphasised to continue the ongoing structural reforms to consolidate the economic gains. The country needs to achieve economic growth of 7 percent in next few years, which is achievable, he added. Vice President of Asian Development Bank said that they are exploring social sector for investment. Health, education, and water resource management are so important for the economic growth of the country, he explained. The ADB is currently financing the power sector and public sector entities reforms in Pakistan. “We will see other public sector entities like Pakistan International Airlines and Pakistan Steel Mills if government asks for financing,” said former country director Werner Liepach, who was also present on the occasion. The ADB has supported China Pakistan Economic Corridor (CPEC), which is very helpful in regional integration. He said that ADB is interested to finance the projects of Pakistan Railways. Earlier, Wencai Zhang called on the Finance Minister Ishaq Dar. The Vice President said that development cooperation has expanded between Pakistan and ADB during the last few years, which has resulted in impressive levels of approvals and disbursement of aid from ADB to Pakistan in FY 2016-17.He said that ADB is interested in learning more about the government’s new initiatives, including the Pakistan Development Fund (PDF) and the Pakistan Infrastructure Bank (PIB), with a view to potentially collaborate on them with the government. The Vice President said that the ADB’s recent experience of policy-based lending for reforms in Pakistan has been very successful. Both sides agreed to identify further areas where reforms are required, which may be good candidates for policy based lending. The areas that are being explored in this regard include governance and public sector enterprise reforms. He reiterated ADB’s commitment to supporting development initiatives in Pakistan. The finance minister appreciated the role of ADB as a development partner for Pakistan. He congratulated the Vice President on ADB’s 50th Anniversary, and appreciated the Vice President’s visit to Pakistan to celebrate the anniversary. He appreciated contributions of former Country Director, Werner Liepach, and the progress made in a short time by current Country Director, Ms. Xiaohong Yang. The finance minister said that, after having achieved macroeconomic stability, the government is now focused on achieving higher, sustainable and inclusive economic growth. He said that federal PSDP of Rs. 1,001 billion for FY 2018 is over three times higher than federal PSDP for FY 2013. He highlighted that provincial transfers have increased significantly due to increase in tax collections during the last 4 years, and as a result, the provinces are in good fiscal shape. He said that both ADB and the Government of Pakistan must work together to further strengthen this relationship. He appreciated ADB’s interest in participating in the government’s initiatives, such as PDF and PIB, which will enable mobilization of resources for further infrastructure projects in the country. The finance minister said that the Government of Pakistan will continue to work closely with development partners on initiatives aimed at improving the quality of lives of the people of Pakistan.

CDWP approves 17 Developmental Projects

on 17/07/2017

Central Development Working Party (CDWP) has approved 17 development projects worth Rs178.3 billion. It also forwarded 6 mega projects, including RBOD-I-II and III to the Executive Committee of National Economic Council (ECNEC) for further approval. The approved projects are of transport & communications, energy, water resources, information technology, higher education, physical planning & housing, health and governance sectors. The meeting was chaired by Federal Minister and Deputy Chairman Planning Commission, Ahsan Iqbal and was attended by officials from different ministries and provincial governments. The body gave go ahead to Right Bank Outfall Drain I, II and III worth Rs90.2 billion and recommended it to ECNEC for further approval. The cost of RBOD-I is Rs17.5 billion, RBOD-II Rs61.9 billion and RBOD-III Rs10.8 billion. The project was referred by ECNEC to CDWP for revision and reconsideration. The RBOD-II project was reconsidered by the CDWP in March 2017 wherein the financing mechanism of flood component of RBOD-II was discussed in detail. After agreement by the Sindh government to share the flood protection cost (Rs7 billion), the project was approved by CDWP. In transport and communication sector, CDWP recommended three projects of Rs43.2 billion to ECNEC.CDWP recommended CAREC (Central Asia Regional Economic Cooperation) Corridor Development Investment Program Tranche-I Projects to ECNEC for approval. The project is part of CAREC Corridor road network 5 & 6 which connects Pakistan up north to China and west through Afghanistan respectively.The Rs24.7 billion Asian Development Bank financed project envisages improving 208 km of N-55 road in three sections including Petaro to Sehwan Section dualization, 128 km, Ratodero to Shikarpur Section dualization, 44 km, including construction of 2 km bypass at Lakhi town to avoid huge cost of land and impacts of resettlements and rehabilitation of existing dual carriageway from Darra Adam Khel to Peshawar Section, 36 km. Construction of Shaheed Benazir Bhutto Bridge over Indus with Guide Banks linking N-5 with N-55 including approach roads worth Rs9.8 billion was also approved by CDWP. The revised project envisages construction of 1.2 km and 11.9 meter wide two lanes single carriageway bridge across River Indus, connecting district Ranjanpur (Mithankot), located on the National Highway (N-55) with district Rahim Yar Khan (Chachran), located on the National Highway (N-5). Another project in transport & communication sector that CDWP forwarded to ECNEC for further approval is Rs8.6 billion project for the construction of Chitral – Garam Chashma – Doraha Pass Road (82.5 km). The project envisages construction, rehabilitation, improvement and widening of existing 82.5 km and 3.65 meter wide road to a width of 7.3 meter of Chitral – Garam Chashma to Doraha Pass. The scope of work also includes elimination of major causeways to have all weather road, construction of 10 km new road on other side of Lutkho River for tourist activities with allied facilities & stretches. The project has been taken up as a result of announcement of the Prime Minister during his recent visit to Chitral. In physical planning & housing sector, CDWP approved two projects worth 29.4 billion. In physical planning, CDWP recommended Punjab Intermediate Cities Improvement Investment Program’ worth Rs27.2 billion to ECNEC. The project includes transforming the selected urban areas of Sailkot and Sahiwal into green, inclusive, resilient and comparative smart cities with improved livability supporting social and economic growth through improved municipal governance, integrated urban planning, improved service delivery, efficient local mobility and climate resilient infrastructure and introduction of IT for city service delivery improvement with the framework of SMART City. The chair recommended cost rationalization for this project to be completed with the support of Asian Development Bank. Similarly, the CDWP also approved the project of Rural Sanitation through Saaf Suthro Sindh (SSS). This Sindh government project of 2.2 billion rupees would be financed by Asian Development Bank. CDWP further approved two projects in information technology sector worth Rs 2.7 billion. It includes e-office (basic common applications) replication at divisions of federal government. The e-office or e-filing system comprising of six modules which were developed as pilot project at ministry of information technology, including internal communications & movement of files, human resource management system, inventory & procurement management system, project management system, finance, planning & budgeting, internal portal. Ahsan Iqbal instructed to ensure CDWP meetings to be held through e-office system in future. Another IT sector project approved includes Pakistan Post Reform Initiatives: Automation of Post Offices. The proposed project will facilitate Pakistan Post and improve public service at its business units. This will also provide value added services including Online Post Stores, Mobile Card Top-Ups through Mobile Companies to Pakistan Post clients in future. Automation of Pakistan Post will improve financial control, ensure accurate assessment of budget estimates, improve customer service, decrease workload on Pakistan Post staff and extend additional facilities to public. The project would be completed through Korean soft loan. The Planning Commission Forum approved Rs104.7 million energy sector project ‘Hiring Consultancy Services for Third Party Validation of Neelum Jhehlum Hydropower Project. The project will broadly include validation of actual cost incurred under various phases, assessment of cost of various activities as per awarded contracts and evaluation, assessment of delays and cost overrun thereof, in order to determine value for money. Minister Ahsan Iqbal instructed to prepare ToRs to ensure realistic and clear evaluation of the project. The meeting also approved three projects in health sector worth Rs1.2 billion which include strengthening of health services Academy, Islamabad, establishment of safe blood transfusion services project phase II, KP and establishment of medical device development center (MDDC) at NUST. The MDDC project envisages of development of medical devices including stents. CDWP approved a Rs 2.4 billion agriculture project promotion of olive cultivation on commercial scale in Pakistan besides giving go ahead to Economic Affairs Division project ‘Strengthening of External Debt Management worth 64 million. In education sector, CDWP approved three projects worth Rs9.7 billion, including Award of Scholarship to Students from Gwadar, Science Talent Farming Scheme and mega project ‘Award of Allama Muhammad Iqbal 3000 Scholarships to Afghan Students’. Under the project Award of Scholarship to Students from Gwadar, students will be facilitated to get higher education at Pakistan’s universities and learn Chinese language abroad. Under the project Award of Allama Muhammad Iqbal Scholarships to Afghan Students’, 3000 students would be facilitated to get higher education in Pakistan’s universities. The project also envisages short professional training to Afghan civil servants.

KP raises fresh concerns on corridor

on 17/07/2017

PESHAWAR: Khyber Pakhtunkhwa government has conveyed concerns to  federal government about several aspects missing from the draft of long term plan (LTP) of China Pakistan Economic Corridor (CPEC) project, including western and northern routes, Sino-Pak trade imbalance and water resource management. LTP 2017 is a national plan approved by both Chinese and Pak governments and would remain effective till 2030. Its’ short and medium term aspects would be operative until 2020 and 2025, respectively. Officials said LTP draft was shared with KP government seeking comments and suggestion on plan’s various aspects. However, the government was given only 5 days to review the plan and offer comments. Time allowed for envisioning holistically and offering comprehensive comments on LTP for such a significant ‘game changer’ with far reaching effects is extremely limited. A federal government official said this while high lighting concerns over plan’s missing links. KP government shared its 11 page interim response with federal government. The response, offers critique of various parts of 30 page LTP. In its LTP appraisal, KP government pointed out that plan’s connectivity chapter was silent about western route being undertaken by federal government and northern route (three passages), of which one passage had been accepted by CPEC joint coordination committee. Regarding second northern route, it noted that entire CPEC trade was based on a single passage (Haripur to Khunjerab), which passes through world’s most difficult terrain. `From a strategic point of view, it noted that a fully functional back-up route is needed from first Gilgit to Mardan, second from Bisham to Alupur and third from Besham to Mardan. Besides, it pointed out that the document also misses Indus Highway connectivity to Afghanistan and Central Asia through KP, besides failing to integrate FATA with rest of Pakistan. It noted that document only mentions Chinese key functional zones, while Pakistan’s key functional zones are not mentioned. LTP is a Pakistani document and needs to state its needs properly, it added. Chapter concerning industries and industrial parks, said Pakistan’s important economic zones, other than Gwadar Free Trade Area, need to be mentioned and failure to treat the subject properly may lead to miscarriage of development. In KP, promotion of Hattar, Rashakai and Dera Ismail Khan special economic zones would contribute to Pakistan`s economic growth. It also points out that LTP pays inadequate attention to mining sector, which is important for both KP and Balochistan. The document went on to note that the northern tourism belt centered around KP and GB. Development of northern routes is not mentioned in LTP, while in energy sector, development of oil and gas sectors also needed to be addressed. The document said trade imbalance between China and Pakistan needs mentioning in LTP. It proposed that under industrial collaboration, those industries need to be set up that aim at import substitution in Pakistan and on making Pakistan an export hub. It also suggested developing floriculture saying KP has immense potential for it and flower exports will have an excellent brand image of Pakistan. The document also asked for a 5 years plan for Pak-China economic cooperation, industry regulations, time for opening financial institutions, inclusion of dairy sector and dispute resolution mechanism to resolve commercial disputes with simple laws. KP government also proposed a second fiber optic cable route in north running from KP to Gwadar, to provide an alternative connectivity to Afghanistan, Iran and Central Asia. It said LTP needs to define core and radiation zones where parts of Punjab, KP, Baluchistan and GB are included as core zones and country’s areas f all under radiation zones.  It said the documents did not adequately foresee growth potential in KP’s urban economic centers and therefore, towns of Abbottabad, Nowshera and Mardan etc need to be mentioned as nodes. Being dead on CPEC route, these will see exponential growth, it added.

WB tribunal upholds TCC claim

on 17/07/2017

 Pakistan may face $11.5 b penality

An arbitration tribunal of  World Bank has ruled in favor of Tethyan Copper Company Pvt Ltd (TCC) in Reko Diq gold mine project case. As a consequence, Pakistan may face a penalty of $11.5 billion for not awarding the project to TCC. World Bank’s International Center for Settlement of Investment Disputes (ICSID) had earlier rejected Pakistan government’s application to dismiss TCC’s claims on grounds of corruption and malpractices by the latter. Both the federal and provincial governments submitted applications before ICSID and International Criminal Court (ICC) in The Hague during 2015-16, seeking admittance of new evidence showing TCC’s corrupt practices in Reko Diq affairs for illegal and undue gains. The move turned futile as the court ruled against Pakistan government for unlawful denial of the mining lease for Reko Diq to TCC which is a joint venture of Chile’s Antofagasta and Canada’s Barrick Gold Corporation. The TCC had initially filled the claim in 2012. Later in 2017, the company filed for compensatory damages amounting to $9.1 billion based on fair market value of its investments in the project till November 15, 2011. In addition, it also filed a claim of $2.3 billion as pre-award compound interest. Now, the government has to submit its reply to TCC’s damages claims. It merits mentioning that the PPP government had made an unsuccessful attempt to settle the dispute with TCC and, had also warned the Balochistan government of not paying pay damages in case of any adverse ruling from international tribunals. TCC held 75% shares while Balochistan had a 25% stake in the project. The company claims to have invested over $500 million in exploration, scoping and feasibility studies of the project. The total investment in the project was projected as $5 billion over a period of five years. TCC and Balochistan reached a deadlock in 2009 because of two major issues. One that Balochistan refused to take financial responsibility against its 25 percent stake. Two, the TCC was not in favor of the involvement of a Chinese company. A letter written by Pakistan’s Ambassador to Chile Burhanul Islam to then Petroleum Minister Naveed Qamar in September 2009 had advised against involving Metallurgical Corporation of China in the same mining site. In a feasibility report submitted to the Balochistan government, TCC projected a turnover of over $60 billion for the gold and copper project over a span of 56 years. This projection was based on a price of $2.2 per pound of copper and $925 per ounce of gold, in the year 2009. The mine has estimated reserves of 11.65 million tons of copper and 21.18 million ounces of gold.