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Understanding Chinese Investment

Understanding Chinese Investment

In the spirit of development and our admiration for the Chinese who are now heavily investing in conflict-ridden Pakistan, it is perhaps distasteful to nitpick on the deals signed between Pakistan and China this week.

Having said that, blindly applauding the 46 billion dollar carrot, just because of its unprecedented size and shape, is not the most prudent way forward either.

Last year in November, the spokesman of the Ministry of Planning and Development for Pakistan, Amir Zamir said, ‘There is no loan or aid for the energy projects, but pure investment by the Chinese’. Zamir made the investment sound like a godsend river of unending honey, which is not the case.

Perhaps to inflate the government’s efforts in securing the deal, the term Zamir did not use is ‘project finance’ – a long-term investment based on the projected cash flows of the project as opposed to the balance sheet of the sponsors (Silk Road Fund and the China Three Gorges South Asia Investment in this case).

So how does project finance really work? In layman terms, the growing assets of the project act as collateral to the debt needed to fund the project and once the project starts generating revenue, it services the debt, with interest.

For example, the Karot hydropower project in Jhelum, which was finalized among other energy projects this week, has a debt-equity ratio of 80:20 where equity is roughly USD 285 million and debt is roughly USD 1140 million. This debt has to be cleared with Chinese banks that are offering us a loan on Libor plus 4.75 percent (while the project is under construction).

The investment horizon of the project is 50 years; which means we hope to benefit from this deal over the next five decades; which means we cannot afford gaps in commitment and transparency; which means we cannot afford variations in our energy policy, which is typically contingent on changing governments.

In other words, the real fruit of Chinese investment in Pakistan is in the gradual and painstaking implementation of the envisioned projects, not in the immediate signing of any deal.

A healthy dose of skepticism is thus needed to help keep the grand vision of infrastructural development on track. Take an example from this week alone: the government inaugurated the first ever green parliament in Islamabad and then, in the same breath, declared all future wind and solar energy projects unfeasible to make room for the USD 22 billion LNG deal with Qatar.

Why is the government thinking of energy as a zero-sum-game? In the wake of all this investment, do they have any plans to reach off-grid communities? As Pakistanis, do we have a unified vision on how to deal with the energy crisis; a vision that can support various long-term commitments with other nations? These are just some of the questions that have disappeared under the avalanche of an unprecedented, historical investment – from any one country – into Pakistan.

Our blinkers, however, are not fuelled by money alone. There is also the long-standing tradition of exchanging adulation, where Pakistan and China seem like they are compensating for not having any linguistic, religious or cultural ties in common – only the weighty geopolitical considerations that add to the seriousness of the strategic partnership and subtract none of the stress.

According to the Pew research centre, and this does not come as a surprise, Pakistanis have the most favorable view of the Chinese after China itself. Driving around Lahore and Islamabad, one can witness the ‘love’ emanating from every standee and billboard, smothering our Chinese brothers with praise.

Pew therefore only validates what we are able to witness through state funded media.

Beyond the ‘iron-brother-friends-forever’ fluff bubble – an established preamble to all Pakistan-China deals since 1950 – there is 46 billion dollars worth of meat for entrepreneurs, traders, vendors, consultants, professionals and businesses in the region to chew on.

While healthy skepticism keeps the government on its toes, and unhindered praise for China fills the sentimental vacuum the two countries probably otherwise feel between each other, it’s important to encourage new business opportunities that will benefit from the development of an enhanced port in Gwadar and a trade corridor connecting Western China to the Gulf countries via Pakistan.

Gwadar, rightly dubbed the ‘doorstep of the Middle East’, has the potential of earning freight and cargo services from goods leaving Western China, the land-locked Caspian region and the Gulf countries.

As the crow flies, Gwadar is roughly 600kms from Muscat, 1800kms from Dubai, and 4000kms from Doha – routes Pakistan will benefit from as soon as we connect the north and south with a secure thoroughfare.

How this thoroughfare can enable new services and industries is what Pakistan should vociferously debate on talk shows now and leave petty politics aside.

For instance, this week in parliament, when the Chinese premier attended a joint session, Nawaz Sharif asked the speaker (albeit in Urdu) to introduce Imran Khan to Xi Jinping as the ‘Khan who delayed his visit by four months’. Maybe it was his sense of humor, an inside joke with the speaker, maybe it was accrued venom. Regardless of how Nawaz meant it, it was unnecessary.

If Pakistan’s journey to absolute financial and energy independence was merely a few months away, I might have empathized with Nawaz. But we are talking about decades here – a time neither Nawaz nor Imran will live to see.

Pakistan needs an uplift that transcends generations but every time we assign more weight to interparty-politics, we rob Pakistan from our collective input – the only thing that can help us find our way out of the dark.

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