Gwadar and CPEC – Reality Check

This is a subject which deserves to be tackled with utmost seriousness, as it is one in which it is becoming increasingly difficult to discern fact from fiction, and where rhetoric is found to trump reality every time. It will thus be my endeavour to present as realistic and pragmatic a picture as possible to enable this vital issue to be better understood in an wholesome perspective.

That the port of Gwadar and the interlinking corridor are vitally important to the country has been established beyond doubt. The trick lies in converting this vision into a viable reality. To do so, our foremost consideration should be to learn from history by analysing the fate of similar prestigious maritime-related projects, like for instance Karachi Shipyard & Engineering Works Ltd, Port Bin Qasim and its adjoining steel mill and the on-going Karachi Deepwater Container Port. All were preceded by hype similar to the one we now hear about Gwadar and all of them are hardly success stories to warm the heart: some are floundering, some barely getting by, while the last one mentioned, the Karachi Deepwater Container Port, which is still struggling for closure, is destined to be headed for failure. The point worth understanding is that building ports and shipyards does not ipso facto make a country a great maritime power; running them well, does.

I’d rather not go into any further details on this assertion for fear of digressing from the main topic under discussion, but simply emphasise the merits of a comprehensive feasibility study, of preparing a progressive implementation plan and of regularly conducting periodical reviews to ensure that the project remains on track. As to the precise course of action recommended to be followed, I’ll revert to that later.

George Santayana had once observed that ‘those who cannot remember the past are condemned to repeat it”. This ill-advised repetition is something we can ill-afford with respect to this vital project.

Gwadar Port – Events of the Recent Past

The current adulation surrounding Gwadar is not new; it has been doing the rounds since the mid- nineteen eighties. Permit me to refresh our collective memory by recounting the events of the recent past:

a. After a series of abortive ground-breaking ceremonies, construction of the first phase of the port kicked off in 2002 when the Govt of China pledged US$ 248 million for the project.

b. This phase, comprising of four medium-sized berths and a channel dredged to a depth of 12.5 meters, financed and executed by the Chinese, was officially inaugurated in March 2007.

c. Port management was subsequently handed over to the Port of Singapore Authority. PSA was bound by the agreement to spend at least US$ 525 million on the port as well as the adjacent Free Zone, which it was also supposed to manage.

d. Since no ships were touching port for obvious reasons, and with no one expressing interest in investing in the Free Zone area, it became increasingly obvious that a change of port operator was in order. The only snag was that the agreement signed was binding for a period of 40 years and any unilateral attempt to terminate it would have led to exorbitant compensatory claims.

e. China Overseas Port Holding Company, which was keen on taking over, thus negotiated directly with PSA for transference of its legal rights. This resulted in the termination of the original concession agreement in 2012 and signing of a new agreement with COPHC an year later(18 Feb 2013).

Progress 2007 to 2015

So what exactly has transpired between the time the first phase was operationalised in 2007 till now:

a. Let alone generating any revenue, the port has been soaking up money in terms of staff salaries and port maintenance, dredging in particular. The few ships(carrying wheat and urea), which were forced to reroute to Gwadar as a face-saving measure, actually added to the public exchequer’s burden, for had they proceeded directly to Karachi or Bin Qasim as originally planned, the costs incurred in cargo handling and shipment would have been around 7 times lower.

b. PSA didn’t invest the money it was supposed to under the agreement on the pretext that 584 acres out of the total 923 hectares earmarked for the zone had not been handed over.

c. No investment has yet materialised in the Free Zone due to an absence of essentially needed facilities and utilities.

The haste with which the management of the port as well as the Free Zone was handed over is frankly beyond me; it just didn’t make any sense, economic or otherwise.

Port and Zone Management by COPHC

So now that Port Management has been taken over by COPHC, can we finally look forward to days of wine and roses? Regrettably, not so! The original agreement signed with PSA was extremely one-sided, with Pakistan expected to provide all facilities and services, leaving the latter to simply reap the ensuing benefits. The subsequent agreement with COPHC is unfortunately a continuation of the original one; but more of that anon.

Regional Perspectives

With the hype surrounding Gwadar reaching a crescendo, certain perceptions have been concurrently instilled in the public imagination. The general feeling is that countries like USA, UAE, Oman, Iran, Afghanistan and India are dead set against this project and look upon it as a threat to their own interests. Without meaning to dissuade anyone into abandoning their line of thinking, I’d simply like to offer a less complex and perhaps fresher perspective for whatever it’s worth:

a. US. US opposition is not directed against Pakistan per se, but against China, whose soft power it continuously endeavours to curtail. Capitalising on China’s souring relations with countries bordering the South China Sea and to reassure its allies in the region, US hastened to seal a 12-nation accord on Trans-Pacific Partnership.

b. UAE. Gwadar, or any other regional port for that matter, can hardly pose any challenge to Dubai, for the simple reason that Dubai is much more than a port: it has become a way of life. One man’s vision has been neatly converted into a living reality. It now offers opportunities and amenities beyond imagination. That said, the port of Jebel Ali is currently handling 11 million containers per annum, way beyond what all Pakistani terminals are jointly handling(2.5 M), with plans underway to increase this capacity in stages to as much as 55 million containers by the year 2030. Khor Fakhan likewise is a well-established transshipment hub. Dubai moreover is backed by the financial clout of the UAE and its downfall can only come about if the security that it provides comes under threat.

c. Oman. The port of Salalah used to be a sleepy little place, with hardly any commercial activity visible when last I touched base in 1988. Since then, it has cemented its place as one of the region’s hottest transshipment hubs. Oman is now replicating this success story elsewhere and the traditional Omani port of Sohar, amongst others, has already established itself as another transshipment hub of choice. Gwadar apparently has a lot of catching up to do; it has to compete rather than the other way round.

d. Iran. Contrary to popular perception, the ports of Chahbahar and Gwadar are not necessarily in competition; they in fact complement each other, as exemplified by the recent agreement reached on the issue between the two countries. Nothing new here though; Iran had made a similar offer of cooperation almost a decade back. Linkage with the Iranian road and rail network offers easy connectivity with Europe, while CPEC can provide Iran with direct access to China. Chabahar at the moment is already linked with Western Afghanistan and the Central Asian states of Turkmenistan, Uzbekistan and onwards to Kazakhstan via road and rail networks. Cargo is thus already being transported from Chahbahar and Bandar Abbas to Central Asia in a matter of few days, while a similar trip from Karachi takes upto a month. Where the two ports could be in competition is in their quest to lure investors into their respective free trade zones. Healthy competition is however not such a bad thing. Iran appears to have gained a clear edge at the moment after the easing of its nuclear-related sanctions, with a large number of European entrepreneurs and businessmen making a beeline for the country.

e. Afghanistan. Pakistan’s renegotiation of the transit trade agreement with Afghanistan in 2010 and it’s denial of the Afghani request for permitting Indo-Afghan transit trade through Pakistani territory has led to a level of estrangement where Afghanistan has already started rerouting the bulk of its transit trade through Iran. It has been helped in this endeavour by India, which has financed and executed a convenient road network through Western Afghanistan towards the East and to the North.

d. India. Indian objections to Gwadar were related to its insecurities regarding Chinese incursion into the Indian Ocean, while its criticism of the CPEC sprang from the fact that it passed through Gilgit-Baltistan, which it officially considers as part of its own country. But after being denied the use of Pakistani territory for undertaking its transit trade with Afghanistan, India ‘s interest in Chahbahar deepened. Her plans to invest in one or two container terminals there were put on hold owing to the international sanctions imposed on Iran. India instead turned her attention towards developing roads within Afghanistan, meant to link up with the existing Iranian network. This served a dual purpose: generating friendship with the Afghans and aiding the ongoing Indian mining effort within Afghanistan, while laying the groundwork at the same time for the subsequent development of the container terminals at Chabahar once the sanctions eased.

Broader Scope

However much we may like to delude ourselves and others that Gwadar and CPEC constitutes the centre of global attention, believe me it isn’t. It is just one link of a larger Eurasian network(and even beyond to Africa and Russia), a plan conceived a long time ago by China, but unveiled just two years back by the Chinese President as the ‘One Belt One Road’ initiative. China is going about it in a systematic manner, having obviously realised much earlier that it is far more desirable to invest its vast foreign currency reserves on opening up the less developed areas of the Asian landmass, than opt for low-yield US Treasury Bonds, where 60% of it is already parked.

China’s Vision and Plans

Following its decision in 1978 to reform its economy, China focussed its development efforts on its eastern coastal region, where it carved out six Special Economic Zones. Shenzhen, which was just a fishing village in the eighties, is now China’s most developed SEZ. Having reached saturation point towards the East, China is now turning its attention inwards towards its least developed western region, which comprises of 68% of its territory, yet houses only 27% of its populace. As a prelude, it invested in the Karakoram Highway linking Pakistan’s Northern Areas to Kashgar, and in the Indian Ocean ports of Gwadar in Pakistan, Sittwe in Myanmar, Chittagong in Bangladesh and Hambantota in Sri Lanka. The magnitude of the Chinese vision can be gauged from the fact that it is planning to build the Kra Canal in Thailand and another massive canal through Nicaragua to facilitate trade by shortening existing shipping distances through Malacca Strait and the Panama Canal respectively. China also plans to invest more than US$ 50 billion in similar infrastructural work in Iran to enable linkages with Europe and the Middle East.

China’s Grand Scheme

The simple fact, howsoever unpalatable, is that its all about China, always has been. Gwadar and CPEC may mean a lot to us, but they are just cogs in a large Chinese machine. While applauding the Chinese for their vision and its impeccable execution, our endeavour should be to learn from the disciplined model that they represent. Within 18 months of the unveiling of the ‘One Belt One Road’ concept, a comprehensive plan of action had been prepared, with the Asian Infrastructure Investment Bank being successfully launched and the Silk Road Fund established. The plan now enjoys widespread support in Eurasia and beyond.

Advantages of Gwadar over other Pakistani Ports

In Gwadar and CPEC lie immense possibilities and opportunities, which we can only really benefit from if we play our cards right. In order to do that, we need to play to our strengths. The advantages which Gwadar enjoys over the ports of Karachi and Bin Qasim are:

a. Ideally poised for development as a transshipment hub.

b. Ideally located for meeting Afghanistan’s transit trade requirements via Quetta.

c. Provides convenient linkages with the Iranian railroad system, which can provide inter connectivity to Europe and CAS.

d. Possesses an huge area for utilisation as a Free Trade Zone.

e. Can open up the less developed areas of Pakistan for exploitation.

f. Can assist in the development of the country’s western coast as per an approved Integrated Coastal Management Plan.

g. Ideally located to capitalise upon the huge regional demand for ship repairs and maintenance.

Ship Repairs and Maintenance Facilities at Gwadar

The last point raised deserves a bit of elaboration as it is the only sphere where we can truly become the regional top cat if we are so inclined. A large number of merchant vessels traverse the nearby Gulf of Oman each day. These ships definitely need routine periodical maintenance or even emergency docking at times. Such facilities, both inside and outside the Gulf are limited and if Pakistan can develop ship repairs and maintenance facilities on modern lines, inclusive of skilled manpower, covered bays and synchro-lifts, we can easily fill the existing vacuum. In order to effectively pick up the slack, however, the proposed docks and bays, as well as the channel should be geared to accommodate ultra large container vessels and their equivalent. This is what I meant by playing to our strengths.

Despite the port as well as the Free Zone being available for the past eight years, none of these advantages could sadly be exploited so far.

Local Developments CPEC

Taking notice of the objections being raised as to the manner in which CPEC-related projects were unfolding and in a bid to assuage the prevalent feelings of deprivation amongst the country’s western regions, the Prime Minister had announced, during the APC of 28 May 2015 that preferential treatment would be given to the western route of the corridor through Quetta, DI Khan and Attock. Despite this directive, no work on any of the projects related to this agreed route has been undertaken so far and neither have any funds been allocated for the purpose. The need for reaping quick dividends by focussing on an already developed route of the corridor notwithstanding, the genuine grievances of Baluchistan and even KPK can only be ignored at our peril, for therein lie the seeds of provincial discord. A point worth noting here is that the interests of the two countries may not necessarily coincide. China would obviously put its money on projects that offer direct and arguably early benefits to her. This is why the bulk of the investment figure of US$46 billion that is being talked about, which would be coming from a consortium of private Chinese banks, has reportedly been earmarked for energy projects near built-up urban areas, from where they can reap quick dividends.

Gwadar Port and Free Zone Management Aspects

Another important aspect worth touching upon with respect to the port and its adjoining Free Zone is whether its management should be entrusted to the local private sector or should be outsourced to other countries. This point is now moot, as the decision to first hand over management control to PSA and later to COPHC for a longish period of 40 years has already been taken. The downside to this arrangement is that Pakistan would now merely be getting only 9% of the gross revenue from terminal services and 15% only of the gross revenue from income derived from the Free Zone Area set up on the land transferred to the port operator under the agreement, although the Free Zone Company, of which COPHC would be a shareholder, would be enjoying a 20 year tax holiday at GoPs expense. An associated catch to this arrangement is that assessment of the income generated would be totally dependent on what COPHC chooses to declare. But on the other hand, with profit margins so heavily tilted in favour of the Chinese company, they furnish it with the right sort of incentive to ensure the port’s success.

Recommendations

But that’s all in the past. The way to a brighter tomorrow lies in devising and methodically pursuing a realistic implementation plan:

a. The approved feasibility study should be brought in the public domain for the sake of transparency.

b. A comprehensive plan of action, inclusive of phases, timeframes and responsibilities assigned, should also be prepared and shared.

c. The plan should cater to the effective exploitation of the inherent advantages conferred by the Port and Free Zone of Gwadar.

d. A supreme national coordination body should oversee implementation of the project, inclusive of coordination between the provinces, the numerous agencies involved and the neighbouring countries.

e. Gwadar’s main claim to fame as the most convenient and most direct link to China’s western region in terms of facilitating trade in oil and goods, should be capitalised upon.

f. Immediate action is needed to upgrade the port to act as a transshipment hub, in anticipation of which an MOU should preferably be signed with the Chinese Government to formalise the routing of Chinese container ships to this port to make it a success.

g. Requisite conditions be created to entice the much-needed investment for setting up a state of the art ship repair and maintenance facility to cater to regional requirements.

h. The genuine grievances of the province of Baluchistan should not be left unaddressed.

j. The marginalised regions of the country should be accorded greater attention.

k. Foremost priority should be accorded to strengthening the rail network, being the most cost-effective means of inland transportation.

l. The new railway line proposed to be laid between Gwadar and Chaman should be expeditiously undertaken and be of standard gauge to permit future connectivity with Europe, CAS and the Middle East through Afghanistan and Iran.

m. The Pakistani private sector should be encouraged to bid for the various infrastructural projects planned.

n. Concentration on reaping the ‘Early Harvest’ should not distract us from pursuing the other important projects in an equally robust manner.

Conclusion

I have deliberately left the most important aspect to the last: security. Without ensuring foolproof security in a region wracked with turmoil and senseless violence, all this will remain a pipe dream.

Gwadar/CPEC is an idea whose time has come; but it is up to us to ensure that it has really come, through timely decision-making and effective implementation. Whatever I have said should thus be taken in this context and in this spirit. As the famous Scottish poet Robert Burns said: ‘The best laid schemes o’ mice an’ men, Gang aft Agley(often go awry)’: this is what we must guard against, as there is far too much at stake. Our biggest enemy after all is our own incompetence.

10 Comments

  1. Avatar zubair janjua October 11, 2015 at 11:39 AM

    An excellent exposition on the subject. Very candid and methodical view of the current situation and where should it lie in future. Our strengths and weaknesses amply highlighted with a clear line to take viz cpec and gwadar. Sir BZ for enlightening us on a very important strategic concept not much discussed in mainstream media. Great work indeed .

    1. pervaizpervaiz October 13, 2015 at 2:36 PM

      Thank you, Zubair.

  2. Avatar Hamid Sohail October 11, 2015 at 6:08 PM

    Aoa Sir, thought provoking and precise article.As you said security is the main issue, so what in your opinion should be the set up for such an endeavour and how to go about it.

    1. pervaizpervaiz October 13, 2015 at 2:35 PM

      I think the foremost thing is to set our own house in order, by discouraging extremism of all kinds and giving due attention to the less developed regions of Baluchistan and KPK, and everything will fall into place. The Govt is contemplating the setting up of a dedicated protection force; this force should be well-trained and deeply motivated.

  3. Avatar Masood October 31, 2015 at 10:43 AM

    Thanks a lot sir for highly insightful article. In the euphoria surrounding CPEC, the issue of free zone management aspect has been almost completely ignored. Have not heard any body else raise this issue. Thanks again sir.

    1. pervaizpervaiz November 1, 2015 at 5:58 AM

      Thanks! I am glad the article proved to be of some use.

  4. Avatar imran nazir December 4, 2015 at 6:58 PM

    Brilliant to say the least.

    1. pervaizpervaiz December 6, 2015 at 2:23 PM

      Thanks! Glad you liked it.

  5. Avatar Bari Malik November 29, 2016 at 12:10 AM

    Sir, Greetings from Greenwich – A very thorough and thought provoking piece Bravo Zulu indeed. Would you care to comment on the recent “visit” to Gwadar vicinity by an Indian Navy submarine and the more organised visit by the Chief of Rusdian Federal Security Services Alexander Bogdanov as well as interest shown by the United Kingdom, Germany, Turkey, Italy and other European countries in CPEC and the possible implications to Pakistan?

    Best Regards

    Bari Malik FRSA

    1. pervaizpervaiz December 5, 2016 at 1:08 PM

      Nice hearing from you. Been a long time! As far as my comments are concerned, I try to resist the temptation of dabbling in speculation or conspiracy theories; plenty of people already doing that! I pray that the interest of so many countries get converted into physical investment. Regards.

Leave A Comment

Your email address will not be published. Required fields are marked *