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EFSAS Commentary

China-Pakistan Economic Corridor: Pakistani report exposes widespread corruption and Chinese exploitation of Pakistan’s resources


There are, curiously, a large number of gullible souls in Pakistan who believe that China’s forays into the Pakistani economy and society through the $62 billion China-Pakistan Economic Corridor (CPEC) are based largely on altruistic considerations, and that China has an innate desire to uplift the lot of the people of the country that it describes as its ‘all weather friend’ by stalling Pakistan’s otherwise rapid descent into the abyss of bankruptcy. Those that think that China will be the savior of Pakistan, and in assuming so choose to ignore China’s track record of snaring vulnerable smaller countries into vicious debt traps through its much touted Belt and Road Initiative (BRI), of which the CPEC has been projected as a flagship, are actively and assertively encouraged to do so by the Pakistani ruling establishment. This is hardly surprising as it is Pakistan’s ruling elite, and especially the stalwarts of the Pakistani military establishment, that stand to gain the most from the corridor. However, the recent leak of a report commissioned by the Pakistani government has vividly exposed how this ruling elite, in crooked connivance with the Chinese entities involved, has been pulling the wool over the eyes of trusting Pakistani citizens who are having to bear the brunt of their crass plunder.

The power sector, the Gwadar Port and highways are the key pillars of the first phase of the CPEC. Despite the enhanced generation in Pakistan because of the new CPEC power projects, the skyrocketing costs of electricity in the country, with residents of cities like Karachi having to shell out a steep 17.69 Pakistan rupees per unit, was leading to disquiet and anxiety. The hapless Prime Minister Imran Khan, kept blissfully clueless about the real goings-on in the power sector and the CPEC by his props within the military establishment, decided last year to delve into the reasons behind high power tariffs and ordered a probe by a nine-member committee headed by the former chairman of the Securities and Exchange Commission of Pakistan (SECP), Mohammad Ali. The role of Chinese companies as financers and executors of CPEC projects was among the aspects scrutinized by the committee.

This committee recently submitted a unanimous 278-page long report titled the ‘Committee for Power Sector Audit, Circular Debt Reservation, and Future Roadmap’ to Imran Khan. This report revealed that the committee had unearthed “violation of the Standard Operating Procedures (SOPs) that include the cost of the installation of Independent Power Producers (IPPs), government agreements, alleged embezzlement in fuel consumption, power tariff, guaranteed profit in dollars, and certain conditions of power purchase”.

The Economic Times daily, which claimed to be in possession of a copy of the report, wrote that it revealed that six China-funded power projects under the CPEC had generated disproportionately high profits through over-invoicing and much higher tariff charges for the Chinese firms that had set up the plants than the rates prevailing in the market. The committee found that the Chinese investors took out their equity upfront by over-invoicing the cost of plant and machinery. Comparisons between the Pakistan government owned power projects and those funded by the Chinese were also done, and these cast the Chinese projects in a dim light. Further, the committee discovered that between $2.5-2.6 billion in excess payments were made to Chinese firms in two coal-based projects under the CPEC.

The report also underlined that government-to-government deals signed under the CPEC had unduly favoured Chinese investors. While the committee red flagged several China-linked power projects, both coal-fired and wind energy, two Chinese coal power producers, Huaneng Shandong Ruyi (HSR) and Port Qasim Electric Power Company Limited (PQEPCL), came in for particular criticism on account of violation of standard procedures and for indulging in malpractices. Both the Chinese producers showed excess set-up costs in order to generate additional profits, and their exceedingly high annual profits were of the tune of 50 to 70 per cent. The report lamented that the cost of the illicit gains of these Chinese companies was borne by Pakistani consumers.

Interestingly, the committee also tried to take the regional milieu into consideration and carried out a comparison with a similar project in neighbouring India. On the Pakistani side, it took the Matiari to Lahore High Voltage Direct Current (HVDC) Transmission Line, which was a priority project under the CPEC. The Pakistani government-owned National Transmission & Despatch Company (NTDC) and the State Grid Cooperation of China (SGCC) signed a cooperation agreement for the development of this project in April 2015. The report highlighted that since this project was awarded under the CPEC through a government-to-government agreement, no bidding was carried out for it. The National Electric Power Regulatory Authority (NEPRA) of Pakistan eventually approved a total cost of $1.7 billion for this project in November 2016. In contrast, a similar project was awarded in India in January 2017 through international competitive bidding. The report pointed out that ABB Limited from Zurich was the winning bidder, and the Indian transmission line project was cheaper than the Pakistani one by as much as $360 million. The Indian project also had higher specifications as well as greater length than the Pakistani one.

Clearly, something was amiss, and it reeked of corruption and collusion between influential people on both the Pakistani and Chinese sides. The committee’s report, therefore, concluded that “These lop-sided agreements caused unbearable loss to the exchequer. The prevalent practice also led to a hike in power tariffs”. Intriguingly, media reports have suggested that PM Imran Khan’s aides Razak Dawood and Nadeem Baber were among the beneficiaries of the deals for the CPEC power projects.

Even if these aides of PM Khan did indeed benefit from the corruption surrounding the CPEC, as many other influential Pakistani politicians and bureaucrats would also almost certainly have done, the Pakistani institution with the highest earnings from the CPEC-linked commissions, bribes and sleaze, and resultantly having the greatest stakes in it, has been aptly identified by Hussain Haqqani, the former Pakistani Ambassador to the United States (US) who presently is the director for South and Central Asia at the Hudson Institute. In an article titled Pakistan Discovers the High Cost of Chinese Investment’ he wrote, Given the close ties between CPEC and the all-powerful Pakistan military — the CPEC Authority is currently chaired by Lt. General Asim Saleem Bajwa, who is also the Prime Minister’s Special Assistant on Information and Broadcasting — the Committee treaded softly in relation to the Chinese projects”.

Commenting specifically on the aforementioned committee’s report, Haqqani added, “The magnitude of profiteering by the Chinese companies is incomprehensible. The two projects examined by the Pakistani experts’ Committee were worth $3.8 billion at the time of their launch. The Committee found over­payments of Rs. 483.64 billion, which amounts to $3 billion at current rates of exchange. This includes overpayment of Rs. 376.71 billion (approximately $2.3 billion) to HSR and Rs. 106.93 billion (approximately $672 million) to PQEPCL on account of excess set-up cost, excess return due to excess set-up cost in 30 years, and excess return due to miscalculation in Internal Rate of Return (IRR). In its report, the Committee recommended that Rs. 32.46 billion (approximately $204 million) be deducted from the project cost of PQEPCL and HSR; the return payment formula be corrected to reflect actual construction time; and Tariff of PQEPCL and HSR be adjusted accordingly. Under the current formula, in two years of operation, HSR has already recovered 71.18 percent of its original equity invested whereas PQEPCL has recovered 32.46 percent of its original equity in the first year of operation. This is over and above the profits that the companies would have made without subterfuge. Imagine the return the Chinese will generate on the $62 billion CPEC projects. These numbers are way too large to have been missed as oversight or malfeasance of individuals within the companies and their Pakistani counterparts. The experience of the Sri Lankan and Maldives governments suggests that these overpayments are generated with the complicity of leaders in the Pakistan government and the loot shared by all parties”.

While the Pakistani military establishment and its lackeys in the political sphere would have benefitted considerably from the spoils of the CPEC, the total of their earnings would melt into insignificance when compared to what they have allowed the Chinese to plunder from Pakistan in exchange. At the turn of the century, Pakistan’s total debt to China amounted to a mere Pakistani Rupees 818 million. In less than 20 years, and especially since 2014 when the CPEC started, this debt has spiralled to a monstrous Pakistani Rupees 506,062 million, excluding the ‘concessions’ that are built into the government-to-government negotiations. Overall, Pakistan is estimated to owe $6.7 billion in commercial loans to China, which is more than what it owes to the International Monetary Fund (IMF).

Given such a dire situation, it would have behoved the Pakistani government to review the terms of the CPEC to make it more advantageous for the citizens of Pakistan. The Imran Khan-led Pakistan Tehrik-e-Insaf (PTI) government did make some noises in this direction when it came into power in 2018, but the din turned out to be short lived. The government had at that time articulated its desire to put the CPEC “on hold” and renegotiate its terms. However, the harsh reality of where Pakistan stood in relation to China soon became clear to the government when in 2019 PM Khan found himself with no other option but to rush to Beijing to plead for its urgent assistance in preventing Pakistan’s imminent blacklisting by the Financial Action Task Force (FATF), and in countering India’s assertiveness on the Jammu & Kashmir (J&K) issue.

It did not take PM Khan long to realize that his country had put itself so comprehensively at China’s mercy in such a wide range of fields that not only did all talk of renegotiating the terms of the CPEC vanish into thin air, it has also never been articulated again since then. The price of asking China to cover for all of Pakistan’s misdeeds actually turned out to be so steep that Imran Khan found himself constrained at the end of 2019 to sign on the dotted line even for the second phase of the CPEC. This second phase, which has since commenced, will focus on industries, agriculture and trade. Sections of the media quoted a senior Pakistani diplomat as saying about this development that, “Instead of reviewing the terms of the first phase of the CPEC, Beijing has actually enforced its will on the second phase as well. There have been no changes in the execution of the projects and the road map for the corridor. In fact, China has explicitly expressed displeasure over the lack of activity over the past year and a half”.

Equally relevant in ensuring that the CPEC moved along unhindered was the role of the Pakistani military establishment. Even as the Pakistani government was talking of reviewing the terms of the CPEC in 2018, the senior leadership of the Pakistani military went out of the way to assure China that all was well with the CPEC, and that the government would be dealt with appropriately for speaking out of turn. The stakes were too high for the establishment for it to allow a puppet prime minister to even talk of rocking the boat. Soon thereafter, PM Khan was directed to appoint Lieutenant General Asim Saleem Bajwa as the head of the CPEC authority, which he duly did.  

Through all this, it is obvious that while China is laughing the entire way to the bank carrying truckloads of ill-earned Pakistani money, and the Pakistani military establishment is gleefully counting every corrupt penny that it has been able to squeeze out of CPEC projects by selling out to the Chinese, it is the common man in Pakistan who will have to bear the brunt of their greed and treachery by shelling out exorbitantly inflated amounts for their power and other tariffs.

For Pakistan and the common Pakistani, the worst of the CPEC is yet to come, but the Generals don’t really care.