CPEC The War Games

The year 1979 was a year of great happenings in South Asia. On 1st Jan ’79 Noor Mohd Taraki the head of the state started implementing the land reforms in Afghanistan to disprove that ‘unwanted favours earn no gratitude.’ The communist pipe dream to bring down every body to the same level of penury ended when the highly unpopular reform extracted the pound of flesh from the dreamer. Noor Mohd Taraki was assassinated in Sep ’79. But the forces of destruction unhinged in this country by his intervention are in the process of smothering the land and people even now. Prosperity, we should know is the gift of statesmanship!

What are the qualities which differentiates a leader from the crowd he/she leads? A leader, in my opinion should have a functioning common sense and be blessed with courage. Courage is not the volition to become adventurous. It is the quality to sit down at the negotiating table and talk. In short he should be worldly wise means any theoretical advice should be weighed on the scales of pragmatism. The de-monetisation announced by Narendra Modi on 8th Nov ’16 is an exhibition of courage and understanding of the ground level reality. It succeeded!

In the 2nd week of Feb ’79 the religious leader Ali Ahmed Khomeini arrived in Iran after 16 years of exile. Within a week’s time Pahlavi dynasty collapsed and the revolution, which had begun earlier, reached its culmination on 4th Nov ’79 when 52 American diplomats and citizens were held hostage by Muslim students. The siege continued for an unprecedented 444 days. The revolution consumed the erstwhile ruling elite of Iran. But the events took a strange turn. Iran-Iraq war made strange bed fellows. Israel sold scuds and anti-tank ammunition to Iran and the money was routed to Contra rebels by the CIA. America behaves like a bull on a narrow street. Show it a red flag and it starts galloping. And people fall right and left. What kind of economic model accommodates very expensive wars? Why are economist gifted with the Nobel Prizes when every other year we see a meltdown?

The brutal side of Iran-Iraq war was on display when Ali Khomeini stamped “the keys to heaven” and lockets were put around the necks of little children who were made to advance and clear the mine fields.  Blood is not thicker than water. That is my assessment!

On 2nd March 1963, an agreement was signed between China and Pakistan which authorised the two countries to exchange areas to establish the border between the two countries. This paved the way for the construction of Karakoram Highway. This 1300 Km Highway was completed in 1979. But Z A Bhutto was not there to see the fruition of his dream. He was hanged on 4th April ’79 unceremoniously and without any regret.

Was Bhutto a pragmatic leader? Where did his 1000 year war with India vow lead him and his country to? And was Zia ul Haq any better? He didn’t lead Pakistan to a better future. He misled a very poor people down the road into an unfathomable pit.

It is my considered view that the Chinese statesman are made up of different mettle than those around the world. Like a snow fed river never halts its motion, likewise they never stop thinking, setting goals, working out layers of defences and employing the resources of ancient wisdom inherited by them from the past.

The Cuban missile crisis unfolded on 16th Oct. 1962. The world was on its edge till the crisis was resolved on 28th Oct ’62. While the world was occupied with the chances of an apocalypse, the Chinese PLA moved into Aksai Chin and Chashul into India on 20th Oct ’62. It means that the alert Chinese implemented a plan at a time that was opportune and least embarrassing. The Plan was already there the timing for execution was superb. All people die. But the wise live in the hearts of generations even after they leave their physical bodies.

And Chinese Statesmen are wise; there is no doubt about it.

So India was humiliated and humbled. Earlier Nehru had surrendered the initiative when he abetted the annexation of Tibet by China. The surrender by India was to be established through a military victory. The Chinese voluntary withdrawal from the occupied areas cemented that surrender. The mountain games were ready to be taken to the next level.

The dates are worth noting. On 13th Oct negotiations between Pakistan and China started. The Bay of Pigs adventure had ended in a fiasco which fostered a rethink by the Soviets to secure Cuba from future aggressions. On 16th Oct Cuban Missile crisis unfolds. After a long period of tense negotiations an agreement between the US president and Khrushchev was reached. The Soviets agreed to dismantle their offensive weapons SS-4 and R-14 subject to the verification by the UN in return a public declaration by the US and agreement never to invade Cuba.  Secretly America dismantled MRBMs from Italy and Turkey.

On 20th Oct China invades India. It is interesting to note how the Chinese made their deft moves to achieve their objective. On 20th Nov the naval blockade of Cuba was lifted. On 20th Nov China announced unilateral ceasefire.

In 1959 the Chinese maps showed some areas of Pakistan in China. In 1961 Ayub Khan sent a note of protest to China. China ignored it. Whether it was a secret understanding between the two countries or to gain goodwill of China, Pakistan voted in favour of a seat for China in the UN. The talks which started on 13th Oct ’62 ended with the signing of agreement between the two countries on 2nd March ’63. The agreement resulted in China withdrawing from 750 sq. kms of its territory. In return it received 2050 sq kms of area which belongs to the J&K state.

I can’t recall any murmur of protest from the Indian side on this major breach of the UN dictated cease fire agreement between India and Pakistan.

Kashgar is a land locked North western Xinjiang region. In order to get it connected to Middle East, Europe and Africa deep port Gwadar is the shortest route. So through a network of highways, railways and pipelines merchandize gets transported cheaply. Chinese investment in Africa cannot be rivalled. Therefore the ‘Holes through the mountains’ and bridges over the brooks and rivers makes sense for China. But what is there in it for Pakistan?

In modern times we not only produce instant coffee but also instant scholars and experts. Those who have never seen a mountain talk about the Mount Everest! Who can say that CPEC will be a game changer for Pakistan? How can a poor country like Pakistan get involved in the net of a Shylock? What exports are going towards China which Pakistan produces in her factories and farms? The feel good factor doesn’t justify the almost fatalistic wager of a gambler. Only a clairvoyant can predict all is hunky dory with the project. Is there any information about the variables which may destabilise the applecart?

The plot thickens as the CPEC is sugar coated with such projects which have nothing to do with it. The original Karakoram Highway up gradation to pass through Baluchistan to reach the port can be understood. But what have, Karachi circular Railway, Peshawar Mass Transit, Quetta Mass Transit and Lahore Orange Line Metro train to do with CPEC. The amalgamation of various projects put on display by Pakistan on line cpec.gov.in appears a means to satisfy a minor section of literate population of Pakistan. The riddle can be unravelled if we visit the scorched land of post LTTE Sri Lanka.

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The LTTE mis-adventure made Colombo to move closer to China because India/America would not help Rajapakse government in overcoming the scourge of the LTTE. The void thus created was filled up by China and closer ties started to develop in return for military aid to subdue the LTTE. After sometime Rajapakse upgraded ties to a strategic “co-operative partnership” and opened Colombo’s doors to a wave of senior defensive and political personnel. It is anybody’s guess that China had fixed its eyes on the importance of the island nation because it is positioned along the East-West sea lines of communication. This route connects China to its energy suppliers in the Middle East and Africa.

The delusional ineptitude of Rajapakse made him to fall for the charms of Chinese chameleon. So before the first agreement for arms aid was signed in 2007, China extracted a land deal from Rajapakse. According to this agreement Sri Lanka agreed to lease land to a Chinese consortium at Hambantota. The land was to be acquired for construction of deep water port at a cost of $ 1 billion. This place, poorly located in a jungle is/was the home district of the President. So China advanced loan not interest free to Sri Lanka at a place which was not required by it. The Chinese convinced the Lankans that revenue would flow from the traffic of ships moving in and out of the port. In this way hypothetical gains in the future were staked against the present real hard investment which carried the burden of interest as well.

In the first phase a corpus of $361 million was spent and the port was ready in Nov 2010. Once trapped in the honey trap of a happy future, Beijing coerced Colombo to construct an International Airport near Hambantota and advanced $200 million. Afterwards another $810 was advanced for second phase. It is any body’s guess who had use for this facility in a remote area?

 Next came the CPCP (Colombo Port City Project) and Railway Project. The CPCP swallowed 233 hectares of land and an investment of $ 1.4 billion. The CPCP is being constructed by China Harbour Engineering Company. Very little amount of this investment reaches the host country and that is any body’s guess.

Meanwhile the Chinese non-military aid soared from a few million dollars in 2005 to $ 1 billion in 2008. Additional 5 billion was given in aid and loans between 2009 and 2015.

One has to understand the web of deceit woven by China that Sri Lanka in this period has been paying $ 30 million per year in interest payment alone. Today the financial marsh created by Rajapakse is swallowing 1/3rd of revenue of Sri Lanka for servicing the debt. The latest we hear from Sri Lanka is that she has granted the Chinese companies operating rights to 4 out of 7 births at the port on 35 year lease.

Meanwhile Sri Lanka’s trade deficit with China soared. The imports worth 3.8 billion exceed imports by a factor of 15! No wonder the present dispensation in an open admission wailed: We have sunk 1.5 billion in the project and earned no revenue!

When the Lankan’s realised that that they could not afford the repayment obligations, they agreed to give the Chinese an equity stake in the port. The project was already haemorrhaging money and losses went up to 18.8 billion. As an aside the Chinese insisted on building a large industrial zone of 1500 acres next to the port for investors/housing for personnel. Next we hear that the government gave policing rights inside housing colonies. It means the path for building Chinese enclaves inside Sri Lanka has been facilitated.

How many dishonest Sri Lankans might have benefitted from the slush money which must have changed hands to sell the interests of the people at a throw away prices? They could have made more money by selling designated areas to foreigners in transparent deals to enrich their national treasury.

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Pakistan is our angry neighbour. The idea of Pakistan has delivered only pain and penury to ordinary people. She also gives India sleepless nights. But what Pakistan can’t observe is that it has made a lethargic country to wake up and take control of defences. So Pakistan invests and India harvests. There was a time when SALT-1 negotiations were going on between the US and USSR, Nehru declared: Disarmament will start from India! This made China scary and had to teach Indian politicians some lessons in the art of statesmanship. A country of Indian dimensions needed a small war to wake up and look around. It was this wakeup call which saved our day in 1965 when Pakistan launched operation Gibraltar to outsmart India in the plains of the Punjab.

Pakistan needs to be more wary of China especially when the Sri Lankan example is before us. In Feb 2017 Sri Lankan Ambassador said in Beijing: I do not know about other countries, but Sri Lanka very categorically informed the Chinese investors that the port will not be allowed for military purposes. He further said that the port was being handed over with 80% stake for a Chinese firm for 99 year lease as it has no commercial viability and we are duty bound to pay back huge Chinese loans.

 I wonder if it is the statement of an ambassador. It is not even dictated by the Chinese foreign office. It is a statement drafted by a shopkeeper who calls himself a company and makes a mockery of the worth of an ambassador.

What has a Chinese company to do with the military operations in the sea route? Yet the Chinese submarine “Great Wall No 329” was in Colombo harbour from 7-14 Sep ’14 and that too when India Sri Lanka Agreement “Trincomalee or any other port will not be made available for military use by any country in a manner prejudicial to India” is still in force.

There was a time when England became the money lender of the world. During those times China had shut herself up. Now that page of the Chinese history stands turned over. China is leaving her foot prints everywhere. China is the latest money lender of the world!

CPEC- Part 2

 There is no honour amongst thieves! But they have no use for such cultural niceties. The modern states, while looking at the annual budgets deal with millions and billions. The actual money is stacked in banks and treasuries. Millions of the past decade becomes billions because the inflation eats up the exchange value of the currency and to bridge the gap money is printed. So money is also a commodity. And money is power to be used sparingly so says Leo Tolstoy.

The politicians, who come from a variety of backgrounds, when they see these numbers, become uneasy. The temptation to make a quick buck eclipses the very reason which makes them to come forward and serve the country.

 The CPEC project did not cut much ice initially with the most of the politicians of Pakistan. Around 2014 there was almost a deadlock. After a second spate of conflict the Pak leaders reached a consensus in 2016. How did it happen? Can the Panama Papers help us? But that is a very recent addition to the list of such areas/countries which have benefited in the past from helping International white collar criminals to park their slush.

 China, thanks to Kissinger diplomacy has accumulated foreign exchange reserve to the tune of $ 3.2 trillion. Now this is a soft but effective facility which can buy influences around the globe. So one Border One Road was conceived very early by the Chinese, to access the resources of other countries. The first to be targeted were the already impoverished African countries. The British imperialism and slave trade had considerably made these countries to crawl. The instant dictators provided an excellent opportunity for China to move aggressively in Africa.

 The recipients of OBOR initiative in Africa are Kenya, Tanzania and Zimbabwe. Eastern Europe presents the farthest geographic stretch of OBOR. Poland and Hungry have become the first EU member states to initiate high speed rail projects under OBOR. Russia and China are collaborating on the massive Siberian pipe line project.

 The secret of why is OBOR so dear to China is that it is not based on aid or FDI. It is actually based on loan financing! This underscores the importance for creditors and debtors alike, to carefully factor in risks with OBOR projects.

 What stories did China weave around their deft moves in Sri Lanka to tempt Pakistan to take the bait we can’t say? But the Chinese must have played upon the sentiments of Pakis’ by spicing up the fiction with anti-Indian rhetoric. So the resource starved Pakistan started ogling at the offer of the CPEC. It was retailed as an unmatched gift to Pakistan.  Pakistan accepted the bait. Politics over ruled economics! Caution was thrown to winds. The very poor people of Pakistan were about to be tricked into a trap which every Shylock spreads as he advances the loans.

 Once the ruling party in Pakistan decided to go for the project, negotiations started. We know that the de-facto dictators of Pakistan are essential partners in the deals of such magnitude. So the negotiations were conducted hurriedly while observing utmost secrecy.

Was the rise of Modi responsible for Pakistan to chicken out and sell the interests of the Pakistani people against an assurance something like Insurance Companies do? Pakistan especially its Army have gone into habit of earning transit money and making merry ever since American cow boys came galloping into Afghanistan to do what England failed to achieve when she was in India. Apart from transit money what more is there for Pakistan in this project. Chinese consume the produce of their own heavy industries besides employing their own labour force in such projects. OBOR we should understand is not an FDI project.

It appears that disquiet has set in Pakistan regarding the exigencies accompanying the CPEC project. No wonder, the services of ex- ambassador to the UN, Munir Akram were commissioned, to write paeans in favour of the said project. The Dawn Newspaper published his article “Double Happiness” recently in which he sugar coats the bitter pill to push it down the throats of sceptics in typical Mark Antony style. The soft underbelly of Pakistan’s economy is on full display under the canopy of happiness Shamyana!

He says: Pakistan’s double digit growth is possible only with CPEC. CPEC is important to China and stabilises its “Iron Brother” Pakistan! Before CPEC the growth was frozen at 3.5% which is now 5%. FDI was not happening which is now coming. Then he opens up a bit and accepts that Chinese companies also work on market principals. They seek profit. China has allowed the companies to compete for various projects and thus allowed Pakistani counterpart, if they wish, to negotiate choosing participants (in equipment supply and construction) at the best market prices. If monopoly control of price gouging has occurred, for example in some power projects it has been only due to collusion of Pakistani entities and in some cases, western equipment suppliers.

 Then he comes to economics and the real trouble.

Chinese loans for government projects are provided on concessional terms. The proportional burden for their repayment will decline as Pakistani economy grows. For commercial projects, Chinese partners arrange loans at around 5 to 6% with extended repayment provisions. In order to tempt the Pakistanis to accept the bait he adds Pakistan has floated sovereign bonds at 8%. (See the stupid comparison).  Increasingly Chinese companies are also willing to put equity into commercial and thus share part of the risk. Terms:

1) Commercial loans are expected to be paid back from anticipated profits.

2) A part of the debt is likely to be offloaded through share sales in public market

Then he comes to admission part of the narrative. Investment in infra-structure and growth sectors in Pakistan are constrained by the paucity of inadequate local finance, inefficient tax collection and wasteful expenditure on loss making state corporations swallowing populist subsidies. Bold policy action is essential. In the private sector, apart from a few family conglomerates Pakistani enterprises do not possess the capacity to put up initial equity even for sound projects. Most can’t finance the preparation bankable feasible studies. Yet it is in these smaller enterprises that jobs can be generated.

 Local banks and financial institutions including the dormant China-Pakistan Development Company should be incentivised to provide start up finance to smaller enterprises locally and externally generated private equity funds can also play a vital role in bridging the domestic financial shortfall. Finally to take advantage of domestic demand-led growth, Pakistan must formulate a long term Pakistan-First Trade and Industrial Policy. Most of the Pakistan’s free trade agreements have been concluded on the presumption that it can expand exports if it has trade excess. Yet, history proves unless a country has the capacity to produce goods, it can’t export them even if it has the access. To build domestic capacity, Pakistan must selectively discourage import of goods it can produce. Once competitive such products can be exported. To implement this policy Foreign Trade Agreements and WTO tariff schedules and commitments must be comprehensively revised. Illegal smuggling of dumped goods from Afghanistan and elsewhere effectively halted.

Pakistanis should thank Akram for telling them in a roundabout way that there is neither any infrastructure in place nor seed money to harvest hypothetical prosperity for the country. Whatever is being built is keeping Chinese manufacturing installation busy in China.

Now a look at the project activities going on simultaneously in the plains!

The 1.6 billion dollar metro train project in Lahore is moving full steam. Money!

The value of Power and infrastructure deal concluded around the trade corridor has increased from the original 46 billion to 57 billion dollars.

In provincial capitals of Sind, KP and Baluchistan costs for Railways and Transport have swelled.

In less than two years the Chinese officials claim their government companies have spent 14 billion dollars.

The discussion is now slowly shifting from the shiver and awe of the CPEC related projects to the concerns of how to meet the repayment deadlines and interests on loans in drawing room discussions. Munir Akram tells to Pakistanis in no uncertain terms: No we can’t meet the demands of the Chinese. We have been tricked and trapped!

 What is being hidden from the public eye? The numbers that are filtering out in dribs and drabs about guaranteed rates of returns are not reassuring. How much toll is expected to be collected? What is Pakistan going to export to China- a country which exports bulk of the products to international markets? Why would industrial estates along the isolated corridor succeed when they have failed in major locations of Peshawar and Quetta? How many jobs will be created after the huge investment is made?

 Neither international agencies nor Pakistani citizens believe that the present government is forthcoming about the facts. Past evidences tell us that only vested interests have called the shots like in Thar Coal project. The story of Recko Diq is more interesting. Pakistanis call it high way robbery. I think both were based on the Chinese involvement. Even the locals did not benefit from these projects.

 If transit money can save a country from financial ruin and become a game changer then why has Muslim Brotherhood flourished in Egypt? After all, the Suez Canal was also retailed as game changer for Egypt. I think the industrial corridor is now taking shape after so many years and so many assassinations.

The investments being planted by China at present is mind boggling. When all is said and done Pakistan will end up paying 9o billion to China over a span of 30 years.

 Top Line Securities in its report says that leading economists have estimated annual average 3-4 billion/year for fiscal 2020. Saad Hashmey an analyst at the brokerage house said in a report that average repayment of CPEC will be between 3 billion 2020-25. It will range between 2.0 to 5.3 billion with an average payment of 3.7 billion. The icing on the cake is that Pakistan is not seeing any inflow of foreign exchange from CPEC. One should know that project financing is done between the Chinese Companies and banks. Only 25% of the investment is expected to come to Pakistan.

So what is the mystery? If Pakistan is consciously entering the arena of financial wetland what unstated compromises have been made? Is it that some other country has partially under-written the liability clause of the debts? Is there any connection between the Islamic NATO and its command in the hands of Rahil Sharif? Is Pakistan taking advantage of being the only Islamic Nuclear Power to claim leadership of the Sunni world? Why are China and Saudi Arabia converging on Maldives?