Saturday, April 15, 2017

Policy imperatives for CPEC

https://www.dawn.com/news/1325958

ISHRAT HUSAINPUBLISHED APR 10, 2017 03:01A

The writer is former governor of the State Bank of Pakistan.

MOST of the discussion about CPEC has so far focused on financing and future indebtedness but the success of this initiative lies in successful interaction between investment, institutions and policy. What policies are needed to maximise benefits and minimise costs to the country? There are several, but at least six areas need careful design and execution.

Energy policy: The addition of 10,000MW of electricity to the national grid by 2018 would overcome energy shortages. However, it may create unintended adverse consequences for public finances and the liquidity of companies involved in the energy supply chain if other components of the energy policy are not put right. The circular debt would get worse if the gap between the purchase price of power paid by the distribution companies (DISCOs) and the sale revenues collected by them is not bridged. The uniform tariff rate, transmission and distribution losses and energy thefts, discrepancy in the amounts billed and recovered, and the growing account receivables underpin this problem.

Unless DISCOs are either privatised or restructured as commercial organisations free from political interference, this growing circular debt would end up widening the fiscal deficit. The cost of generation to the end users can be reduced if competitive energy markets and energy exchanges are set up, auctions are held for tariff determination and multiple buyers are introduced instead of the present single buyer model. The National Transmission and Despatch Company would recover only the wheeling charges for the use of their transmission infrastructure.

Industrial policy: The Special Economic Zones (SEZs), industrial parks, etc to be set up along CPEC should be open to Pakistani firms on the same terms as to the Chinese. Land should be allotted on long-term lease rather than outright purchase and the leases auctioned only to genuine, prequalified bidders to eliminate land grabbers and speculators. In Balochistan, some portion should be reserved for local investors wherever feasible. The lease should incorporate a provision that the allotment would be cancelled if the project is not operational within three years. All infrastructure works — power, gas, water, roads, effluent plants, amenities — should be in place before the possession is passed on.

Six areas need careful consideration if we are to maximise CPEC’s benefits.

Pre-feasibility studies should be carried out by SEZ authorities through expert consultancy firms or universities, to provide baseline data and information about the kind of projects that can be established in different zones.

Trade policy: External payments on account of repatriation of profits and debt servicing of CPEC projects would put pressure on the current account. Exports must grow at least 15 per cent annually to meet these new obligations, and remittances have to increase at their historical level. The exchange rate has to be managed deftly to stimulate new export products, new firms and penetration into new markets, while ensuring that prices of imports of capital goods, machinery and equipment are not hiked up, which would make new investments unattractive. Pakistani and other foreign companies winning competitive bidding should have a level playing field.

Free trade Agreements have to be renegotiated to preserve the comparative advantage of Pakistani exports and tariff quotas introduced to safeguard against material injury to Pakistani manufacturers. Import tariff rates must be gradually reduced to enable Pakistani companies to participate in the global supply chain.

Foreign exchange regime: The current foreign exchange regime is becoming too restrictive for making timely payments to suppliers, vendors and financiers. Further restrictions would only divert inflows towards informal channels, resulting in a vicious cycle. As inflows through official channels recede, and demand for outflows through banking channels at interbank rates rises, the State Bank would have to further tighten external payments, prolong the timing and disallow certain genuine payments to conserve their reserves.

As more payments are pushed to the kerb market, the differential between the official and open market rates would widen. Exporters and remitters would channel their earnings at the higher open market rate, reducing the supply in the interbank market. The increased demand by importers and other consumers of foreign exchange at the lower official rate would lead to a demand-supply disequilibrium.

Market sentiment plays an important role in determining the exchange rate; any hint that outflows on account of payments to the Chinese would lead to further restriction in the foreign exchange regime would erode market players’ confidence.

Financial policy: Commercial banks should finance Pakistani companies, either stand alone or in joint ventures with the Chinese companies in collaboration with the infrastructure development fund. This would carefully scrutinise proposals from potential investors, calculate future cash flows, and carry out scenario analysis for risk mitigation. For small and medium enterprises working as sub-contractors to large firms or providing goods and services for CPEC projects, or to establish start-up businesses, existing funds by DFID, USAID, etc should meet this demand.

In Balochistan, southern KP and Gilgit-Baltistan, urban and rural infrastructure projects that link the main highways and motorways under CPEC with the communities should be given priority by their respective set-ups in allocation of development budgets.

Skill development policy: One of CPEC’s benefits would be the training and development of skilled manpower. Plans have to be made to assess long-term manpower requirements, both for construction as well as the operational phases of CPEC projects.

Various categories and levels of training programmes have to thus be designed and then assigned to credible, prequalified providers. Particular attention should be given to train youth from backward areas, starting with Gwadar all the way to the Karakoram Highway.

A number of private and non-profit organisations are actively engaged in quality vocational and technical training, mainly in Karachi and Punjab. These organisations should be invited to set up similar facilities in other parts of the country where CPEC projects are being executed.

In addition to this formal training, internships and attachments with Chinese companies working on the projects should be made an integral part of the curriculum. If there is one lasting legacy for which CPEC should be remembered, it is investment in producing skilled and trained technical manpower with different levels of expertise.

The other missing link in which Pakistan is weak is the institutional capacity, for which a separate analysis would be required.

The writer is former governor of the State Bank of Pakistan.

Published in Dawn, April 10th, 2017

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