CPEC Projects: An Overview
CPEC stands for China-Pakistan Economic Corridor (CPEC), and it is the culmination of decades of exemplary diplomatic ties between Pakistan and China, which have finally entered the economic domain.
CPEC aims to connect the Chinese city of Kashgar in Xinjiang province and Pakistan’s Gwadar port while stimulating economic growth within Pakistan and China’s landlocked western region.
This connectivity will reduce China’s dependence on the 12,000 km long sea routes along the Strait of Malacca, substituting it with a land route of just 2,700 km between Xinjiang and Gwadar.
CPEC lays out a network of regional connectivity that will benefit Pakistan and China and has the potential for regional integration with Iran, Afghanistan, India, and Central Asian Republics.
CPEC linkages will build road and rail transportation systems, allowing greater accessibility and free movement of people and goods as well as exchanges of academic, cultural, and regional knowledge.
This fits with the Chinese mantra of a “win-win” model for collective growth, development, and “shared destiny and prosperity.”
Table of contents
1.1 Areas of Cooperation
The list of CPEC cooperation areas is vast and constantly evolving. According to the CPEC website of the Planning Commission, Government of Pakistan, the potential areas of cooperation/development include:
- Regional connectivity
- Diverse investment opportunities
- Industrial cooperation
- Financial cooperation
- Agricultural cooperation
- Socio-economic development
- Tourism, including coastal tourism
- Educational linkages
- Human resource development
- People-to-people contacts
- Increased livelihood opportunities
- Enhanced security and stability of the region
CPEC projects were initially envisioned to be worth $46 billion when the initiative was launched during President Xi Jinping’s visit to Islamabad in April 2015.
Later, the Chinese side increased the projects’ outlay to $55 billion and eventually to $62 billion.”
1.2 Major CPEC Projects
The CPEC includes an impressive list of megaprojects, mainly in the energy sector and in roads, rail and other infrastructure.
Details of the CPEC projects are as follows:
1.2.1 Energy
To date, $33.8 billion have been pumped into energy projects under the CPEC, adding 12,230 MW of electricity.
Transmission lines are also being revamped. The Government of Pakistan’s official website for CPEC projects lists 17 priority projects, including coal-fired power plants at Sahiwal, Port Qasim, Hub, and Thar.
Major hydroelectric projects include the Karot Hydel and Suki Kinari Hydel projects.
Among renewable energy sources are the Quaid-e-Azam Solar Park Bahawalpur, UEP, Sachal Wind Farms at Jhimpir, and Hydro China Dawood Wind Farm at Gharo.
Other actively promoted hydel projects include Kohala and Azad Pattan in AJK and smaller wind and hydel projects.
1.2.2 Infrastructure
The CPEC lays particular emphasis on roads and railways infrastructure as well.
Major projects include the Karakoram Highway (KKH) Phase II, the Multan-Sukkur Section of the Peshawar-Karachi Motorway, Khuzdar-Basima Road, the upgrade of D.I. Khan-Zhob N-50 road, and KKH Thakot-Raikot section.
The railways’ megaproject is the expansion and reconstruction of the main line (ML-1), estimated at around $6.8 billion, for which negotiations are still ongoing with the Chinese authorities.
1.2.3 Gwadar
Gwadar carries exceptional importance for CPEC. Gwadar port operations have been with China Overseas Ports Holding Company (COPHC) since 2013 on a 40-year lease.
The various projects at Gwadar include the East Bay Expressway, New Gwadar International Airport, Gwadar Free Zone, construction of breakwaters, dredging and berthing areas and channels, Pak-China Friendship Hospital, Pak-China Technical and Vocational Training Institute, and Gwadar Smart Port City Master Plan.
1.2.4 Rail-based Mass Transit Projects
Mass transit projects in all four provincial capitals are envisaged under the CPEC.
These are the Karachi Circular Railway, Greater Peshawar Region Mass Transit, Lahore Orange Line and Quetta Mass Transit.
1.2.5 New Provincial Projects
Efforts are underway to add new projects from the provinces to the existing CPEC list.
These projects are still in the PC-1 preparation and approval phase and will be considered by the Joint Working Group (JWG) for inclusion under CPEC.
These include the Keti Bunder Sea Port Development Project, Naukundi-Mashkelpanjgur road, Chitral CPEC link road from Gilgit-Shandur-Chitral to Chakdara, and Mirpur-Muzaffarabad-Mansehra road for CPEC connectivity.
1.2.6 Special Economic Zones
Nine Special Economic Zones (SEZs) are planned under the CPEC in Phase 2. These SEZs will provide an impetus for industrial development across Pakistan.
The Government of Pakistan is developing SEZs to promote industrial and socioeconomic growth, create jobs, transfer technology, boost foreign direct investment (FDI), and convert to an export-led economy.
The four SEZs at Rashakai, Allama Iqbal Industrial City Faisalabad, Dhabeji Thatta and Bostan Balochistan are expected to add at least 475,000 direct and one million indirect jobs all over Pakistan.”
The remaining SEZs that are planned are ICT Model Industrial Zone Islamabad, Pakistan Steel Mills Industrial Park at Port Qasim, Mirpur Industrial Zone AJK, Mohmand Marble City, and Moqpandass SEZ in Gilgit-Baltistan.
1.2.7 Social Sector Development Projects
These include several initiatives, including people-to-people exchanges (media, culture, films, etc.), transfer of knowledge in different sectors (capacity building training and workshops), the establishment of the Pakistan Academy of Social Sciences (with Higher Education Commission [HEC] as its partner) and transfer of knowledge in the education sector through Consortium of Business Schools (from both China and Pakistan with HEC in the lead).
1.2.8 Others
These include the cross-border optic fiber cable project, the pilot project of Digital Terrestrial Media Broadcast (DTMB), etc.
1.3 Governance Mechanism
The CPEC projects are regularly monitored through the convening of the Joint Cooperation Committee (JCC), which is the highest decision-making body for CPEC-related matters.
The JCC is headed by the Minister for Planning, Development & Special Initiatives from Pakistan’s side, whereas from the Chinese side, it is co-chaired by the Vice Chairman of the National Development and Reforms Committee (NDRC).
To date, nine JCC meetings have been held. The 10″ meeting was scheduled in July 2021 but had to be postponed at the last minute.
Under the JCC, nine Joint Working Groups (JWGs) examine subject-wise issues at the technical level, including the feasibility and progress of ongoing projects.
These include planning, transport infrastructure, industrial parks/special economic zones, international cooperation & coordination, agricultural cooperation, social & economic development, and energy, Gwadar, security issues.
A tenth JWG on science & technology is already approved to be added, for which the necessary MOU was already signed in 2020.
On July 1, 2021, the Federal Minister for Planning, Development & Special Initiatives, Asad Umar, announced that both sides have agreed to add another JWG on information technology.
In October 2019, Pakistan established a CPEC Authority through an ordinance. The Authority is headed by a chairperson who will ensure an accelerated pace of implementation of the CPEC projects.
Lt. Gen. (Retd) Asim Saleem Bajwa was the first Chairperson. The current Chair is Khalid Mansoor, Special Assistant to the Prime Minister (SAPM) on CPEC.”
The Authority is responsible for “planning, facilitating, coordinating, monitoring and evaluating” all CPEC activities, attending to inter-provincial and inter-ministerial coordination, organizing and coordinating JCC and JWG meetings, and conducting sectoral research and narrative building for the CPEC to ensure implementation of mega decisions.
1.4 Progress on CPEC Projects
In the first five years of CPEC, 32 “early harvest projects” were completed by 2020. The first phase of the CPEC (2015-2020) focused on infrastructure, particularly energy and transportation.
The second phase (2021-2025) is directed towards industrial cooperation with investment, especially from the Chinese firms, in SEZs.”
On June 3, 2021, Pakistan’s Foreign Office spokesperson said that 19 projects had been completed, 28 were under construction, and 41 remained in the pipeline.
He said, “CPEC projects have created more than 26,000 jobs and have boosted the local power industry. CPEC motorway projects have also created over 50,000 jobs”.
1.5 Financing Arrangements Under CPEC
Four types of financing arrangements are being used in the CPEC projects. These include:
1.5.1 Investment
Most of the energy projects in CPEC are in the Independent Power Producers (IPPs) mode, with Chinese companies borrowing funds from Chinese banks (mainly from China Development Bank and China Exim Bank) on a commercial basis at an interest rate of 4% to 5%, etc. with no direct debt liability for Pakistan.
Special Purpose Companies (SPCs) have been created for transacting these loans. The majority of the SPCs are owned by Chinese companies, e.g., the International and Commercial Bank of China (ICBC) is providing $1.44 billion to Huaneng Shandong Ruyi (Pakistan) Ltd., an SPC of Huaneng Shandong Power and Shandong Ruyi Group, for development and operation of Sahiwal coal power plant.
Another example is China’s Export-Import (Exim) Bank funding of $1.55 billion for Port Qasim Electric Power Company Limited, an SPC of Power China and Qatar’s Al Mirgab Group that is working on Port Qasim’s coal power plant.
Debt Financing Arrangements For Select CPEC Energy Projects
| Project | Debt Equity | Lender | Borrower | Borrower's Owner | Amount ($ million) |
|---|---|---|---|---|---|
| Port Qasim coal power plant | 77.25 | China Eximbank | Port Qasim Electric Power Co. | PowerChina, Al Miqab Group | 1,550 |
| Suki Kinari Hydropower Station | 75.25 | China Eximbank, ICBC | SK Hydro | China Gezhouba Group, Haseeb Khan | 1,416 |
| Sahiwal coal power plant | 80.20 | ICBC-led sndicate | Huaneng Shandong Ruyi (Pakistan) | Huaneng Shandog Power, Shandong Ruyi Group | 1,440 |
| Engro Thar Block II coal power plant | 75.25 | Bank of China, Bank of Communications, CCB, CBD, China Eximbank, ICBC Pakistani Banks | Engro Powergen Thar Limited | Engro Powergen, China Machinery & Engineering Corp, Habib Bank, Liberty Mills | 831 |
| TEL Thar Block II coal power plant | 75.25 | CBD, Habib Bank | Thar Energy Limited (TEL) | Hub Power Company, Fauji Fertilizer Limited, China Machinery & Engineering Corp | 262 (from CBD) |
| Hydro China Dawood wind farm | 70.30 | ICBC | Hydro China Dawood Power | Hydro China, Dawood Power | 78.8 |
| Quaid-e-Azam solar park | 80.20 | CBD, China Eximbank | Zonergy | ZTE Corp. | 62.2 (and RMB 400 million) |
| UEP wind farm | 75.25 | CBD | United Energy Pakistan | United Energy Group, Orient Group investment Holdings | 252 |
| Sachal wind farm | 85.15 | ICBC | Sachal Energy Department | Arif Habib | 100 (export buyer's credit) |
| Karot Hydropower Station | 80.20 | CBD, China Eximbank, SRF, IFC | Karot Power Co. | CSAIL (owned by China Three Gorges Corporation, SRF, IFC) | 1,392 |
| Three Gorges second and third wind power projects | 70.30 | CBD | Three Gorges Second Wind Farm Pakistan, Three Gorges Third Wind Farm Pakistan | CSAIL (owned by China Three Gorges Corporation, SRF, IFC) | NA |
| Hub coal power plant | 75.25 | Bank of China, Bank of Communications, CCB, CDB, China Eximbank, ICBC | China Power Hub Generation Co. | China Power International Holding, Hub Power Co. | 1,500 |
1.5.2 Concessional Loans
Concessional loans are given to the Government of Pakistan at rebated interest rates with generous lending terms, i.e., at rates of around 1-2% with tenures of 20 years or more.
The first payment due on these loans is usually within five years of the start of the lending period. This is similar to the World Bank’s IDA loans, which usually have a 1-2% interest rate and are extended over 15-20 years.
In contrast, commercial loans are usually at 4-5% interest and must be returned within 5-10 years of borrowing; their servicing options are also limited.
With concessional loans, there is always the option of more liberal servicing, and the tenure may be extended even beyond the 20 years limit if needed.
Examples of projects financed through concessional loans include KKH Phase II, the Multan-Sukkur section of the Karachi-Peshawar Motorway, the Khuzdar-Basima road, etc.
1.5.3 Interest-Free Loans
These constitute only a small percentage of overall CPEC financing. They are without any interest and with a long-term payback period. An example of this interest-free or zero-interest model includes East Bay Expressway and Gwadar.
1.5.4 Grants
Some CPEC projects are also purely on Chinese grants, i.e. donations with no expectation of repayment. The grant-financed type of projects includes Gwadar International Airport, Pak-China Friendship Hospital, etc.
1.5.5 Contribution of Each Sector in CPEC
Out of the estimated $62 billion budget outlay of the entire CPEC by 2019, projects amounting to $19 billion are either complete or under construction. A recent study gives the following break-up of sector-wise financing:
Source Of CPEC money for Completed And Ongoing Projects
1.6 Investment, Financing Mechanism and Supporting Measures
A full section in the long-term plan for CPEC (2017-2030) is dedicated to the investment and financing mechanism and supporting measures agreed upon by both governments.
The following arrangements are listed and elaborated on in the document:
1.6.1 Government Funds
Both governments will primarily finance and invest in public welfare projects.
They will coordinate using Chinese grants, interest-free loans, concessional loans and preferential export buyers’ credit to support strategic priority projects of CPEC, enhance preferential margins where possible, and ensure that the funds are used exclusively in the CPEC projects.
Pakistan’s federal and provincial governments will also allocate funds for CPEC. Provincial governments may issue financial bonds in domestic and foreign capital markets.
Both governments will strive to support credit enhancement for major projects, reduce financing costs and protect the creditors’ rights and interests.
1.6.2 Indirect Financing of Financial Institutions
The two countries will also approach the development of financial institutions and commercial banks and “study and solve financial issues with the CPEC building; explore various ways to support the Silk Road Fund, China-Eurasia Economic Cooperation Fund in participating in the investment and financing for the CPEC.”
1.6.3 Direct Investment of Enterprises
The two sides are also expected to “encourage Chinese enterprises, private sectors and funds of other entities to invest in CPEC, including Pakistan’s private sector, and to establish private financial institutions infrastructure funds, if needed.
1.6.4 Loans From International Financial Institutions
China and Pakistan would also welcome international financial institutions such as the World Bank, Asian Development Bank (ADB), Asia Infrastructure Investment Bank (AIIB), and others to provide long-term concessional loans to the CPEC projects.
1.6.5 Other Innovative Investment and Financing Methods
Pakistan’s government (at both federal and provincial levels) and the private sector will also explore how to finance RMB in China, Hong Kong and other offshore centers dealing in RMB.
Chinese and Pakistani market players will also be asked to mobilize resources from the international market.
1.7 Pakistan’s Financial Obligations in CPEC Projects
There are several ways in which the Government of Pakistan contributes its share towards the CPEC projects.
This includes providing incentives, sharing equity in various projects in partnership with the Chinese government, providing sovereign guarantees on commercial projects, particularly in the energy sector, and funding certain CPEC-related projects through its development budget or Public Sector Development Program (PSDP).
1.7.1 Incentives
To attract Chinese investments, the Government of Pakistan is offering attractive and lucrative benefits, particularly at the SEZs and also to attract Chinese investors to the coal and power plants. NEPRA offered concessional terms to Chinese investors in coal projects through attractive upfront tariffs.
Similarly, a one-time exemption on custom duties and tariffs on all capital goods imported to Pakistan for SEZ development, installation and income tax relief for ten years is being offered.
1.7.2 Equity
There is a wide range of equity sharing between the Government of China and the Government of Pakistan and private firms from both countries.
In some cases, such as the ML-1 railway project, Pakistan and China still negotiate the equity ratio.
Pakistan has sought a 90:10 ratio; however, China is keen on having it at 85:15. Final decision is yet to be taken.
On power projects, debt-equity ratios vary, from 70:30 to 85:15, with loans coming in from Chinese banks.
1.7.3 Sovereign Guarantees
The Government of Pakistan has to provide sovereign guarantees for many of the CPEC projects, including Rs. 1.2 trillion for the ML-1 railway project.
Since the government already grants sovereign guarantees for circular debt, it has to work with IMF to maintain its guarantee limits, currently set at Rs. 1.9 trillion.
Pakistan even committed, at one stage, to set up a revolving fund to cater to unpaid claims of the Chinese energy companies; however, the fund is yet to be established.
1.7.4 PSDP-Funded Projects
According to the official CPEC website of the Ministry of Planning, Development & Special Initiatives, Pakistan allocated a total of Rs. 167.166 billion (around $1.02 billion) in FY2018-19 for CPEC-related projects.
This represents Pakistan’s budget component for the completion of various CPEC projects.
All PSDP funds must be approved through the planning and finance channels, i.e., Central Development Working Party (CDWP), Executive Committee of the National Economic Council (ECNEC), etc.
