Weekly Newsletter: Issues 8 & 9 (June 26, 2018)

This is a review of news and analysis pertaining to the China-Pakistan Economic Corridor and related regional connectivity and security issues, covering the period of June 11-26, 2018.

Gwadar

• Delayed Gwadar electric power project tepidly moves forward. Officials with Pakistan’s Planning Commission say that the 300MW coal power project for Gwadar will be moving toward the “implementation stage” with the expediting of the clearance process and land acquisition.  Not only have no-objection certificates yet to be issued and land acquisition has yet to be completed, but an upfront tariff rate has yet to be determined. Gwadar presently sources all of its electric power from Iran.
• Balochistan governor says Gwadar and Chabahar linkages will boost Iran-Pakistan trade. Gov. Muhammad Khan made these remarks at an iftar dinner hosted by Iran’s consul general in Quetta.

CPEC Projects

• Chinese electric power companies press for “revolving fund.” In 2016, Pakistan approved the creation of a “revolving fund” that would effectively provide a sovereign guarantee for payments to CPEC independent power producers (IPPs). The fund would cover 22 percent of the estimated monthly payments and capacity charges owed to CPEC IPPs (presently around $410 million) to ensure timely payment. The fund was apparently never created and now Chinese companies are lobbying once again for its formation. The federal government’s Power Division has recommended that Islamabad either take out a loan from commercial banks to provide a sovereign guarantee or that the Water and Power ministry’s holding company, Power Holding Private Ltd., secure the loan. The issue of the revolving fund also contributed to the slow pace of progress of the $2 billion high-voltage direct current transmission line from Lahore to Matiari.

Economy and Trade

• World Bank approves Khyber Pass Economic Corridor Project. The $480 million project includes the construction of the four-lane Peshawar-Torkham Expressway (PTEX) from Peshawar to the Torkham border crossing with Afghanistan and the laying of a fiber optic cable alongside the road. Around 16 percent of the project budget will go toward complementary infrastructure projects, including branch roads, logistics hubs, and parking terminals. PTEX will link to Pakistan’s Peshawar to Lahore motorway, which will be extended to Karachi by around 2020. It could also connect to the planned Kabul-Jalalabad-Torkham expressway and eventually to Dushanbe in Tajikistan. The project also includes funding for an international bus terminal in Peshawar and the preservation of tourists sites in the Khyber district (formerly known as the Khyber Agency).
• World Bank to fund Pakistan electricity transmission network modernization. Pakistan and the World Bank signed an agreement to repair Pakistan’s outdated electric power transmission grid. While Pakistan has ramped up electric power generation — installed capacity now exceeds 20,000 MW — according to Pakistan’s Express Tribune the grid only “has the capacity to carry about 15,000-17,000 megawatts of electricity safely.”
• Overland China-Pakistan cross-border trade resumes. Bilateral trade between China and Pakistan through the Sost border crossing in Gilgit-Baltistan had been suspended for 85 days due to local protests against the implementation of Pakistan’s digital customs processing system, WeBOC. Local traders in Gilgit-Baltistan complain that the system is unviable in their area due to slow local Internet access. The WeBOC system has been suspended at Sost and trade has resumed after the mediation of the Pakistan Army.
• Pakistan Railways revenue surges by over 200 percent in six years. The national railway service’s revenues grew from PKR 15.5 billion in 2011-12 to PKR 50 billion in 2017-18. Feasibility studies for the upgrading and extension of the railway’s secondary and tertiary lines (including to Gwadar) are either underway or completed. Pension liabilities eat up around 30 percent of the company’s annual budget.

 Regional/Strategic

• Chinese ambassador to India calls for a trilateral Sino-Indo-Pak summit to increase regional stability. Beijing’s envoy to New Delhi Amb. Luo Zhaohui said, “If China, Russia, and Mongolia can have a trilateral summit, then why can’t India, China, and Pakistan?” India’s Ministry of External Affairs downplayed the proposal, stating: “We have not received any such suggestion from the Chinese government. We consider it as his personal opinion. Matters related to India-Pak relations are bilateral in nature and have no scope for any third county’s involvement.” Beijing seemed to distance itself from its ambassador’s statement.
• India will not oppose CPEC funding through AIIB. Commenting on the Asian Infrastructure Investment Bank (AIIB), India’s minister in charge of finance Piyush Goyal, said that “we should look at how we can benefit from such engagements rather than focusing our efforts on trying to see what they should not be doing.” He noted that the AIIB is an “independent organization” and “not a Chinese-led institution.” India is the second-largest shareholder in the AIIB behind China and the largest recipient of AIIB loans. The AIIB board recently approved a $100 million investment in India’s National Infrastructure and Investment Fund.
• Next round of China-Kyrgyzstan-Uzbekistan railway talks to be held soon. An intergovernmental agreement could be signed this fall. The rail line would run from Kashgar in China’s Xinjiang region to Tashkent in Uzbekistan via Osh in Kyrgyzstan. From Kashgar, cargo could then reach the Arabian Sea via Pakistan’s road (and potentially rail) networks. The project is estimated to cost around $5 billion.
• Interim Chabahar port operator designated. India selected an Iranian company, Kaveh Port and Marine Services, to run the Chabahar port terminal for 18 months, until it selects an Indian private sector operator. India has issued tenders several times for a 10-year terminal operation contract. Importantly, an unnamed Indian official said, “the shortlisted bidders said that the project is of strategic importance and is not commercially viable.” India’s Shipping Minister Nitin Gadkari said that New Delhi hopes to make the port operational by next year.
• New York Times provides inside look at the Hambantota failed Hambantota project. An impressive investigative report by Maria Abi-Habib, their roving South Asia correspondent. Among the revelations: “Sri Lankan officials said that from the start, the intelligence and strategic possibilities of the port’s location were part of the negotiations.”
• Nasheed ally visits India, asks for assistance in Maldives. Ahmed Naseem, who served as foreign minister during Mohammed Nasheed’s presidency, said: “I know that Maldivian officials are telling India that they will look out for its security interests if President Yameen is allowed to return to power [after elections in September]. Don’t be fooled. This regime can never normalise relations with India because their paymasters won’t allow it.” 
  • More: 
    • Maldives ruling party politician denied entry into India (Maldives Independent)
    • India votes against Maldives for UNSC non-permanent seat (Times of India)
    • Maldives tells India to withdraw helicopters (Janes)
    • 2,000 Indians denied work visa by Maldives (Zee News)
    • India lowers limits on export of essential goods to Maldives (The Wire)
    • Pakistan to help Maldives in power sector (Pakistan Today)
• India offers $100 million line of credit to Seychelles for defense acquisitions. Seychelles President Danny Faure visited New Delhi in the wake of the refusal of his country’s National Assembly to ratify the Assumption Island naval base deal with India. Faure and Indian Prime Minister Narendra Modi both made vague statements about the base deal. Modi said, “We have agreed to work together on the Assumption Island project based on each other’s interests.”
• On India’s failing regional strategy: “Faced with a ruthless and more powerful adversary, Modi has made a series of inept moves with respect to traditional allies such as Nepal, Sri Lanka, and the Maldives.” Read more here.
• China and Nepal agree to build Tibet rail line. The two governments signed eight infrastructure and industrial agreements during visit of Nepalese prime minister to Beijing. The rail project would connect Kathmandu to Xigaze in Tibet. According to the joint statement, Beijing and Kathmandu “agreed to intensify implementation” of their MOU on Belt and Road cooperation “within the overarching framework of [the] trans-Himalayan Multi-dimensional Connectivity Network.” The rail line, according to a 2017 report by Reuters, “could cost $7-8 billion and take up to eight years to complete.” Prime Minister Oli said that “cross-border connectivity” was his country’s top priority. In February, he told the South China Morning Post: “We have great connectivity with India and an open border. All that’s fine and we’ll increase connectivity even further, but we can’t forget that we have two neighbours, We don’t want to depend on one country or have one option.” Writing for India’s Quint, Vinay Kaura rightly notes: “It is amply clear from the above statement that Oli has not forgotten Nepal’s suffering and humiliation during the notorious economic blockade of 2015.” Among the $2.5 billion in deals signed include several small hydroelectric power projects.
  • RELATED: Top Pakistani military official makes five-day visit to Nepal. Gen. Zubair Mahmood Hayat, the chairman of the joint chiefs of staff committee, met with senior civilian and military officials in Kathmandu. Hayat’s visit came a month after the Nepalese army chief’s three-day trip to Islamabad. Earlier this year, Pakistan’s then-Prime Minister Shahid Khaqan Abbasi was the first foreign leader to visit Kathmandu after Prime Minister Oli assumed power.
• “China wants an economic return on these [Belt and Road] projects,” says McKinsey senior advisor Gordon Orr. Read the full interview at the Belt & Road Advisory blog.