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China-Pakistan Economic Corridor: Opportunities and Risks


A Chinese worker sits near trucks carrying goods during the opening of a trade project in Gwadar port, some 700 kms west of the Pakistani city of Karachi on November 13, 2016. AAMIR QURESHI / AFP

REPORT  297 / ASIA 29 JUNE 2018

The China-Pakistan Economic Corridor, opened in 2015, could bring needed jobs and investment to Pakistan. But many projects also risk widening social divides and heightening political tensions along the route. With Beijing’s support, Islamabad should seek the public’s input to ensure equity in economic gains.

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What’s new? Pakistani leaders say the China-Pakistan Economic Corridor (CPEC), launched in 2015, is a “game changer” for the country’s ailing economy. But opaque plans for the corridor, the upheaval likely to affect locals along its route, and profits flowing mostly to outsiders could stir unrest. The government has repressed CPEC critics.

Why does it matter? CPEC could help revive Pakistan’s economy. But if it moves ahead without more thorough debate in parliament and provincial legislatures and consultation with locals, it will deepen friction between the federal centre and periphery, roil provinces already long neglected, widen social divides and potentially create new sources of conflict.

What should be done? The government that assumes power after the July 2018 elections should encourage debate about CPEC; consult with business leaders, civil society and locals affected; ensure landowners receive fair compensation; encourage hiring local labour; and allow space for dissent. Beijing and Chinese companies involved should support such measures.

Executive Summary

Envisaged in mid-2013 and launched in April 2015, the China-Pakistan Economic Corridor (CPEC), a set of projects under China’s Belt and Road Initiative, marks a new era of economic ties in a bilateral relationship historically defined by security cooperation. Pakistan’s economy clearly needs reform to better serve its people, and many officials say CPEC will help in this regard. But as currently rolled out, the corridor risks aggravating political tension, widening social divides and generating new sources of conflict in Pakistan. The government that assumes power after Pakistan’s July elections should mitigate these risks by being more transparent about CPEC plans, consulting all stakeholders, including smaller provinces, the business community and civil society, and addressing concerns that the corridor subordinates Pakistan’s interests to those of China. For its part, Beijing also should consult stakeholders in regions that will host CPEC projects it agrees upon with Islamabad. It should encourage Chinese companies to display sensitivity to residents of those areas, including by hiring local labour.

CPEC, which comprises loans, investments and grants that could grow to around $60 billion, travels a 2,700km route. It starts on the Pakistani Arabian Sea port of Gwadar, in Balochistan province, climbs along the Karakoram highway through the Khunjerab pass in Gilgit-Baltistan, before crossing into the Kashgar prefecture in China’s Xinjiang region. Within Pakistan’s territory, the economic and development project prioritises transport infrastructure, industrial development, energy and Balochistan’s strategically located Gwadar port. Agricultural modernisation and production form another critical component.

The Pakistan Muslim League-Nawaz (PML-N) government, which came to power after elections in 2013 and stepped down on 31 May 2018, depicted CPEC as a leap forward both in relations with China and for the country’s economic development. Contenders to national office from across the political spectrum have broadly endorsed this view. Yet some high-level officials and prominent voices in Pakistani business are concerned about the failure to protect local economic interests, high guaranteed returns on equity to Chinese investors and unaffordable national debt.

While it is too early to assess if CPEC can deliver the economic gains Islamabad promises, the project risks inflaming longstanding tensions between the centre and smaller federal units and within provinces over inequitable economic development and resource distribution. Less-developed federal units such as Balochistan and Sindh contend that the corridor’s route, infrastructure and industrial projects will mostly benefit Punjab, already the country’s wealthiest and politically powerful province. Yet, even in Punjab, locals could forcibly resist the state’s acquisition of land for CPEC’s agricultural projects.

 CPEC’s Long-Term Plan (2017-2030) was formulated by the centre with little input from local leaders, business or civil society actors. 

In Balochistan, CPEC is exacerbating existing grievances among a population whose perceptions of exploitation and neglect by the centre, together with authorities’ suppression of dissent, have long fuelled an insurgency. The province will receive no direct financial benefits from Gwadar port, a key CPEC project, which means local anger at Islamabad is likely to intensify. Instead of developing a sleepy fishing village into a bustling commercial hub as pledged by Islamabad and Beijing, the project is producing a heavily militarised zone, displacing locals and depriving them of economic lifelines. In Sindh’s Tharparkar district, coal-based CPEC power projects are not only damaging the environment, but are also displacing locals from their homes and could destroy livelihoods.

Many of these problems stem from opaque policy formulation, and the failure to heed regional and local concerns. CPEC’s Long-Term Plan (2017-2030) was formulated by the centre with little input from local leaders, business or civil society actors. It was not disclosed until December 2017 – and then only in broad strokes – after the rollout of some major elements had already begun. From the project’s entry point, Gwadar, to its exit point, in Gilgit-Baltistan, the state’s response to local dissent and alienation has been an overbearing security presence, marked by army checkpoints, intimidation and harassment of local residents, and crackdowns on anti-CPEC protest.

Perceived geopolitical gains could also take precedence over economic ones. Pakistan’s military establishment views a deeper economic relationship with China, even if tilted in Beijing’s favour, as a counterpoint to rising U.S. diplomatic and economic pressure to end support to Afghanistan- and India-oriented militant proxies. But as it expands its economic footprint in the country, Beijing, too, seems increasingly concerned about the threats posed by such proxies to its national and regional security interests. Moreover, unequal gains, combined with perceptions that CPEC projects undermine the economic, social and political interests of key stakeholders, could aggravate anti-Chinese sentiment within Pakistan. There already have been several attacks on Pakistanis employed in CPEC projects.

Islamabad should ensure that CPEC’s directions and priorities address the country’s economic and political interests, including by taking the following steps:

Build political consensus on the project’s direction, including by fostering debates in the national and provincial legislatures, to ensure that there are equitable gains for all provinces; and stop arrests, harassment and other coercion of critics.

Consult economists, chambers of commerce, the Pakistan Business Council, trade associations and other business community stakeholders, and incorporate measures to address their concerns in a new framework for CPEC special economic zones and development projects.
 Hire local labour and ensure that CPEC projects apply labour protections and practices.
 Consult extensively with local communities about the potential costs and benefits of major development projects and devise an appropriate compensation and resettlement plan for all those displaced, including not just formal landowners but also those with the informal land ownership common across Pakistan. If needed, parliament should consider relevant reforms to the 1894 Land Acquisition Act.

Beijing and Chinese firms should:

Consult and engage the full spectrum of Pakistani stakeholders, from competing elites to the grassroots, as CPEC projects are identified and/or implemented, and prioritise job creation for locals.
 Conduct comprehensive risk and political analysis of CPEC projects to ensure that benefits are shared equitably between competing interests.
 Complement such efforts with effective and extensive communication with Pakistani stakeholders at the local, regional and national levels, so as to illustrate common interests.

For all the risks and challenges, CPEC offers an opportunity to upgrade Pakistan’s aging and dysfunctional infrastructure, and revive a flagging economy. But to deliver on these promises, both Islamabad and Beijing need to implement it with considerably more sensitivity and consultation than they have displayed thus far, with provinces and the communities most affected given a greater voice in shaping CPEC projects. Locals need to see dividends; benefits that overwhelmingly flow to outsiders would aggravate social and political divides, fuelling tension and potentially conflict. As Pakistan’s democratic transition approaches another milestone, with a second consecutive elected government completing a full term, its successor should seize the opportunities of a fresh mandate, shape public debate on CPEC and adopt related policies that put the well-being of Pakistani citizens at their core.

Brussels, 29 June 2018

Construction work taking place in the port of Gwadar, in the southernmost tip of Pakistan, 04 October 2017.CHRISTINE-FELICE ROHRS/DPA

I.Introduction

Security cooperation has long defined Pakistan’s relationship with China, with economic ties lagging far behind military engagement. Since 2015, such ties, focused on the China-Pakistan Economic Corridor (CPEC), a set of projects that are part of Beijing’s Belt and Road Initiative, have assumed new significance.Pakistan’s political leadership calls CPEC a “game changer” that would bring prosperity by revitalising a fragile economy. Its military, which dominates foreign, defence and security policy, perceives closer ties with China as an opportunity to offset rising tensions with the U.S. over Pakistan’s support for Afghanistan- and India-oriented militant groups. For China, geopolitical ambitions, sustained by greater connectivity and trade infrastructure across the region, drive the evolution of the relationship.

This report examines CPEC’s economic and development projects within Pakistan, discusses whether it will bring the broad economic revival that Pakistani leaders claim it will generate, and assesses its political and security costs for Pakistan. It analyses CPEC’s impact on domestic stability and security, particularly the potential for heightened tensions between the federation and federal units, between Islamabad and Gilgit-Baltistan, and on conflict dynamics within provinces. It does not analyse in detail Beijing’s Pakistan policy or its options for CPEC. The report is based on interviews with officials, economists, politicians, security analysts, journalists, activists and other stakeholders in the federal capital, Islamabad, as well as in Balochistan, Punjab and Sindh, conducted from November 2017 to January 2018.

II.The Beijing Connection

A.Balancing Geopolitics and Economics

Geopolitics and security dynamics have long determined the contours of Pakistan’s China policy, with mutual animosity toward India a major factor. In the 1950s, Pakistan anchored its foreign policy in close relations with the U.S., while China and India established strong ties in the Non-Aligned Movement. When a border dispute triggered the 1962 war and unravelled the Sino-Indian relationship, Islamabad seized the opportunity to forge stronger ties with Beijing, including settling their own border dispute by ceding Gilgit-Baltistan’s Shaksgam valley to China. During Pakistan’s 1965 war with India, China provided it limited military but significant diplomatic support. After Pakistan’s loss in the 1971 war with India, resulting in East Pakistan’s secession and the formation of Bangladesh, military ties between Islamabad and Beijing deepened and soon came to define the relationship, including China’s eventual support for Pakistan’s nuclear weapons program.

Economic ties were also historically shaped by strategic priorities such as road connectivity in the border region of Gilgit-Baltistan and Xinjiang. Built in the 1970s, the Karakoram highway connects Pakistan’s north, via Gilgit-Baltistan, through the Khunjerab pass, to Xinjiang’s Kashgar prefecture, rising to 4,700m above sea level in rough mountainous terrain.

Yet Pakistan’s alliance with China has thus far yielded few economic benefits. Not only does China-Pakistan trade lag far behind Sino-Indian trade, it is also outstripped by Chinese trade with similar-sized and even smaller economies than Pakistan’s, such as those of the Philippines and Vietnam.

Moreover, Pakistan’s trade deficit with China has tripled over the last five years, reaching around $12 billion in 2017. Leading economists and representatives of Pakistan’s business community see the country’s Free Trade Agreement (FTA) with China, signed in 2006 and operational the following year, as disproportionately benefiting the latter. Chinese goods have flooded Pakistani markets because the FTA’s concessions mainly favour China and also because Pakistan’s liberal import policy, including low duties and general sales tax, keep down the prices of Chinese machinery and other imports.Meanwhile, high Chinese tariffs make it hard for Pakistani exports to penetrate the Chinese market. A former State Bank governor pointed out: “Part of the problem is our own policies, but the Chinese haven’t done what they could have”.

Islamabad is renegotiating the FTA, seeking safeguards for local industries and incentives for exports and Chinese measures to facilitate duty-free import of some 70 Pakistani items. China has reportedly agreed to liberalise 90 per cent of tariff lines, among other measures to appease Pakistani industry. A prominent economist described Islamabad’s efforts to renegotiate the FTA as “locking your door after everything’s already been stolen”. That said, improved conditions would benefit Pakistan’s economy.

 Pakistani policymaking is still shaped by the ostensible strategic dividends of a close relationship with China as a counterpoint to India and a means of deflecting U.S. pressure. 

Economic ties appear to have gained more importance since CPEC was launched in 2015, as part of China’s Belt and Road Initiative, an ambitious program to invest as much as $1 trillion in new transport and trade infrastructure connecting China to the rest of the world.Islamabad and Beijing conceived CPEC in mid-2013 and formally launched it in April 2015 as a $45 billion economic and development package including loans, investments and grants that could grow to around $60 billion. Some Chinese analysts now consider it the “flagship” of the Belt and Road.

Despite this new emphasis on economic ties, Pakistani policymaking is still shaped by the ostensible strategic dividends of a close relationship with China as a counterpoint to India and a means of deflecting U.S. pressure. A Lahore-based business leader with close knowledge of Pakistan’s dialogue with China said, “as Pakistan gets more isolated internationally, we’re hoping that China will give us a veto [exercise a veto on Pakistan’s behalf] in the UN Security Council, diplomatic and moral support, as well as put pressure on India. That’s what the military wants”. A senior journalist who has long covered security issues said, “the military sees CPEC as a counterforce to a hostile U.S. and India. It will latch on to China even if the deals [under CPEC] are unfair to Pakistan”.

Pakistan’s ties with China have weathered political instability, including previous regime changes and coups, but the removal of former Prime Minister Nawaz Sharif in July 2017 has slowed the pace of CPEC projects, and damaged investor confidence, local and Chinese.Although China insists that political changes in Pakistan have no impact on the bilateral relationship, a senior Sindh official who interacts regularly with Chinese officials and investors said, “the Chinese were disappointed when Nawaz Sharif was ousted; they don’t like this political merry-go-round”. A political economist added, “CPEC has been on hold since Nawaz Sharif’s dismissal; the Chinese are waiting to see what happens after the elections.”Polls are scheduled for 25 July 2018.

B.The Jihadist Factor

The military’s support for Islamist militants and their political fronts, both to protect its jihadist proxies and to destabilise the civilian government, could frustrate Pakistan’s hopes that China would help to neutralise U.S. pressure. Most recently, these fronts include two new Islamist groups, the Barelvi Tehreek-i-Labaik Ya Rasool Allah (or Labaik), and the Milli Muslim League, a political front for the anti-India Lashkar-e-Tayyaba/Jamaat-ud-Dawa; both contested 2017 by-elections in Peshawar and Lahore. A retired top intelligence official said, “there’s a misperception about being able to handle the fallout of the games we play. We assure Beijing, ‘don’t worry’, but then look at our record. The immediate objective might have been to undermine Nawaz Sharif, but we won’t be able to manage the fallout”.

China is particularly concerned about links between militants in Pakistan’s tribal borderlands and disgruntled Uighurs organised as the East Turkestan Islamic Movement (ETIM) in Xinjiang Uighur Autonomous Region. After the 11 September 2001 attacks in the U.S., ETIM members found sanctuary along with other jihadist groups in Pakistan’s Federally Administered Tribal Areas (FATA). Pressured by China, the Pakistani military moved against Uighur militants, claiming to have eliminated them, though many appear to have crossed the border into Afghanistan after the Pakistani military’s 2015 operation in FATA’s North Waziristan.

 China’s patience with the military’s support for jihadist proxies may be waning. 

According a senior ex-intelligence official, “the [Pakistani] military and Chinese perceptions on the jihadi proxy issue will diverge and become an issue but the India factor will prevail and limit any serious Chinese pressure”. Indeed, Beijing has repeatedly blocked the U.S.-backed Indian bid at the United Nations to list Masood Azhar, the leader of the anti-India jihadist Jaish-e-Mohammed, as a “global terrorist”.

That said, China’s patience with the military’s support for jihadist proxies may be waning. At the September 2017 BRICS (Brazil, Russia, India, China, South Africa) summit in China’s city of Xiamen, those countries expressed concern over “the security situation in the region and violence” because of several transnational organisations – these included Pakistan’s Lashkar-e-Tayyaba, Jaish-e-Mohammed and a close ally, the Afghan Haqqani network. China’s decision to support the Financial Action Task Force (FATF)’s move to “grey-list” Pakistan – in other words to include it in the list of countries with weak “anti-money laundering” (AML) and “countering financing of terrorism” (CFT) regimes – during the task force’s plenary session in February this year is yet another signal that it shares, at least to some degree, U.S. and Indian concerns about Pakistan-based jihadist groups.

Warning that Pakistan faced international isolation because it had failed to end state support for such groups, former Prime Minister Nawaz Sharif said that allies like China were concerned. There are even signs that the coming together of U.S. and Chinese positions on these proxies might inspire a rethink in the military command about the institutional costs of such support – the first step toward policy change – given the possible impact on Pakistan’s already troubled economy of a FATF grey-listing (and possible blacklisting).

C.Security Challenges for Chinese Nationals and Projects

As China’s economic footprint expands in Pakistan through CPEC, so, too, do concerns about security threats to its interests and personnel. While exact numbers are not available, there are an estimated 30,000 Chinese nationals living in Pakistan. The numbers of Chinese visiting Pakistan on short term, including tourist visas (often used to bypass bureaucratic hurdles in obtaining business visas) could be as high as 70,000. “With large numbers of Chinese citizens coming into Pakistan”, said a senior police official in Lahore, “security challenges are becoming graver”.

In October 2017, the Chinese embassy in Islamabad claimed there was a militant threat against the ambassador and requested additional security. In December, the embassy said it had received “some information that the security of Chinese institutions and personnel in Pakistan might be threatened”. Chinese firms and analysts see a need to train and employ more private security personnel and enhance security protocols.

A report by a leading Chinese think tank warned that CPEC risks becoming a new arena for competition among deeply divided political parties, levels of government, the military and civilians, and ethnic groups in Pakistan; other Chinese analysts concurred.

Deeming it a national security priority, the Pakistani military has sought more control over key parts of the project. Along with thousands of police and paramilitary officers, a Special Security Division, comprised of 15,580 army personnel and the Maritime Security Force, are tasked with protecting Chinese workers and CPEC projects. This larger military footprint is alienating locals even as CPEC strains relations between the federal units and the federation.

III.Demystifying CPEC

A.A Conceptual Leap?

A Pakistan Business Council representative argued that, “CPEC is primarily a geopolitical project. Economics have merely been added on to it”. But not all business leaders are as sceptical. Given the fragility of Pakistan’s economy, some believe that CPEC could have a useful “demonstration effect, indicating to other investors that Pakistan is a safe and attractive destination for foreign direct investment”. The CEO of a major Karachi-based business conglomerate described CPEC as a “win-win” that will provide Pakistan “much-needed project financing lines to make up for its infrastructure shortages”, and attract other countries’ suppliers and financial institutions to do business in the country. A senior partner at a leading corporate services firm said that once Chinese industrial units were set up in Pakistan, instead of merely exporting raw materials, the country could export high-value products to China.

Politicians across the political spectrum also are mostly supportive. The leader of the opposition in the Senate noted that CPEC could encourage the modernisation of manufacturing; Punjab’s chief minister believed that CPEC would help create jobs. In its annual credit analysis for Pakistan, Moody’s Investors Service concluded that, if successfully implemented, CPEC could transform Pakistan’s economy by stimulating local and foreign investment.

Still, analysis of the economic promise and impact of CPEC – as well as its ability to support a broad set of economic goals and an Islamabad-devised integrated strategy to develop the economy – is hampered by the opacity of its formulation and rollout. Pakistan’s Planning Commission reportedly presented China with a full menu of projects for financing, with little apparent consideration for how these would be best sequenced. The menu includes everything from investment in the power sector to road and rail infrastructure, industrial cooperation and agricultural development. A former Planning Commission head described it as a “kitchen sink approach”.

 CPEC’s Long-Term Plan would speed up Pakistan’s industrialisation and urbanisation. 

There has been little input from key stakeholders, whether parliament, chambers of commerce or civil society organisations. A major daily noted: “The ambitious CPEC partnership has deepened doubts about the willingness of the Pakistani state to be transparent and its ability to negotiate the best possible economic terms in every deal”.

CPEC’s Long-Term Plan (2017-2030), released in December 2017, defines the project broadly as “a growth axis and a development belt”, with “the comprehensive transportation corridor and industrial cooperation between Pakistan and China as the main axis” and “concrete economic and trade cooperation” as “the engine”. The plan names four priorities in Pakistan – the Gwadar port, energy, transport infrastructure and industrial cooperation, which would speed up Pakistan’s industrialisation and urbanisation. According to CPEC’s timelines, short-term projects would be completed by 2020; medium-term projects, including the industrial system, close to completion by 2025; and long-term projects in place by 2030. Yet the plan provides barely any details on planned and proposed projects and agreements.

The seventh meeting of the CPEC Joint Coordination Committee, which reviews and approves CPEC projects, took place in November 2017. The committee’s discussions reportedly suggest a potential shift from concessional loans for energy and infrastructure projects to commercially viable projects that would not qualify for concessional loans. Since sovereign guarantees would likely apply to such commercial loans, it would further increase Pakistan’s national debt. Yet detailed information is limited. A senior journalist investigating CPEC said, “we still know very little about CPEC. The material that would tell us more is still vigorously concealed”. Another analyst commented, “the launch of the detailed CPEC plan neither adds anything new to our understanding of the project nor helps remove the concerns of critics regarding the overall impact of the project”.

The government is largely responsible for this lack of transparency. But though individual parliamentarians have raised concerns about inequitable distribution of CPEC projects and resources, all the major opposition parties have also supported CPEC and been reluctant to discuss it in parliament. Committee chairs and ranking members have failed to promote open debate or exercise oversight over one of Pakistan’s most ambitious economic and geostrategic undertakings.

A power plant in Tharparkar District, Sindh Province, February 2018.INTERNATIONALCRISISGROUP/2018

B.Power Production and Debt

Islamabad has encouraged CPEC investment in power production, with power projects included in its first (“early harvest”) phase. To attract Chinese investment, most plants are being built with Chinese equipment and many will be Chinese-owned. More wattage for the national grid will certainly help reverse the decline in economic productivity caused by long power outages. Yet the pace of implementation has been slow at best. Moreover, International Monetary Fund (IMF) assessments show that Pakistan’s repayment obligations, including the payment of debts and guaranteed rates of return on equity for investors (17 per cent for power projects), “will likely offset a significant share of these [foreign direct investment and other external funding] inflows, such that the current account deficit would widen”. It warned, “Pakistan’s capacity to repay could deteriorate at a faster pace, with faster depletion of foreign exchange reserves and significant implications for economic growth”.

These assessments reflect that in its bid to attract investment, Pakistan offers overly generous terms to foreign (including Chinese) investors. These will be unaffordable if the increased power generation does not yield the expected economic growth. If, and when, Islamabad seeks another IMF bailout, the IMF will likely demand greater transparency in CPEC energy and other projects’ financing, so as to assess the impact of expensive Chinese loans on Pakistan’s balance of payment crisis.

The new plants are in any case inadequate since an aging and inefficient power infrastructure will remain unreformed. Domestic industries and consumers will also continue to pay more, because of a tariff policy that is overly generous to foreign investors and reflects rising expenditure on security for CPEC projects and personnel (discussed below).

C.Special Economic Zones and Industrial Cooperation

Special Economic Zones (SEZs) and industrialisation are among the key areas of cooperation, and possibly the most critical for economic growth and job creation. Of several provincial economic zones Pakistan has proposed so far, China has agreed to first develop one each in Sindh, Khyber Pakhtunkhwa and Punjab. Work has already begun on the largest, the M3 industrial city in Punjab’s Faisalabad district.

Special economic zones were integral to China’s 1980s economic reforms, subject to free-market and export-oriented policies and measures such as tax benefits and preferential treatment of foreign investment.For CPEC, Pakistan’s GSP+ access to the EU will likely attract Chinese investors and producers, as will tax rebates and other incentives. If Pakistani producers and labour benefit, the zones, coupled with pro-export and growth reforms, could indeed create opportunities for Pakistan.

If not, they could undermine existing domestic industry. Information is scarce about how the zones will relate to the rest of the economy, which could slow other investments. For example, producers would be hesitant to establish factories or mills if a nearby CPEC zone produces similar goods but with the benefit of tax, duty and other concessions. An industrialist complained: “There’s no mechanism for such information flows. If the Chinese plan to set up something that competes with me, I’ll find out too late”. Whether these zones will ultimately produce products that can compete in the international market, including against Chinese manufactures is also debatable.

Much depends on Pakistan’s regulatory framework, where there have been few changes to level the playing field. Pakistan’s more than 60 industrial zones (unrelated to CPEC) have done little to increase industrial competitiveness, and the most prominent industries, such as textiles and automobile manufacturers, survive on subsidies and other forms of protection, with few incentives to be competitive. Pakistani policy is skewed toward imports, given a one-time 6 per cent import duty, rather than production. Manufacturing accounts for 13 per cent of the economy but almost 60 per cent of the tax burden.“China is not contracted to make Pakistan more competitive”, said a senior Lahore Chamber of Commerce member. “We have to do that ourselves”.

IV.CPEC: End to End

A.Strains on the Federation

The earliest tussle between the federation and federal units is related to CPEC’s route from Kashgar in Xinjiang to Gwadar port in Balochistan. CPEC was originally meant to pass through and thus help develop impoverished areas of Balochistan as well as southern Punjab and Khyber Pakhtunkhwa. Activists and politicians in all three smaller provinces, Balochistan, Sindh and Khyber Pakhtunkhwa, including the Pashtun nationalist Awami National Party (ANP) and the Islamist Jamiat Ulema-e-Islam [Fazlur Rehman (JUI-F)] alleged that Sharif’s PML-N government had changed the route to benefit its constituents in wealthier parts of central Punjab, the party’s political bastion.

A compromise between the federal and provincial governments yielded three planned routes: western, central and eastern. The western route would pass from the Karakoram highway’s Khunjerab pass on the Gilgit-Baltistan-Xinjiang border, through Islamabad, Khyber Pakhtunkhwa’s Dera Ismail Khan district, Balochistan’s Zhob, Qilla Saifullah, Quetta, Panjgur and Turbat districts, before reaching Gwadar. A central route would pass through Dera Ismail Khan and reach Balochistan’s Khuzdar district and Basima town via interior Sindh and southern Punjab. The eastern route would cover southern and central Punjab districts, including Lahore, Faisalabad, Rahimyar Khan, Bahawalpur and Multan.

The controversy continues, however. With renegotiations and new Chinese conditions on the western corridor, CPEC’s immediate focus is on using and upgrading the existing eastern route before eventually turning to new western routes. A Baloch member of parliament said Chinese officials were wary of developing the western route because of security concerns: “The federal government has created this impression in their mind”. Afrasiab Khattak, a former senator and senior ANP leader from Khyber Pakhtunkhwa, a major jihadist sanctuary, was also critical of the current focus on further developing the eastern route. “We feel cheated”, he said, “Punjab gets the industrial zones and trade; Khyber Pakhtunkhwa gets [militant] training grounds and madrasas”. Yet addressing the adverse impact of CPEC on local communities, both in remote regions and the heartland, is arguably more urgent than settling the controversy about routes.

B.CPEC’s Exit Point: Gilgit-Baltistan

All three prospective CPEC routes cross from Pakistan into China from Gilgit-Baltistan, which Pakistan considers part of disputed Kashmir. Its constitutional status within Pakistan is undetermined and political autonomy a façade, given the circumscribed powers of its elected legislative assembly. Nevertheless, because the Khunjerab pass via the Karakoram highway marks CPEC’s border for both Pakistan and China, there were high expectations among residents that CPEC would offer Gilgit-Baltistan major development dividends. Indeed, Beijing’s ambassador to Pakistan has promised major CPEC-related benefits to the region, including enhanced cross-border trade, upgraded infrastructure and hydropower projects.

Residents’ hopes thus far appear to have been misplaced. Given the mountainous terrain, the single-lane highway in Gilgit-Baltistan can only be upgraded and not significantly widened. “Overland trade”, said a CPEC expert, “is in any case very expensive and would remain so even if the route is developed further”.

Locals in Gilgit-Baltistan are already resentful of what they see as their region’s political and economic isolation. Adding insult to injury is that CPEC projects, designed and implemented without their input, will be of little benefit to them.The ecological costs of infrastructure projects in a mountainous region prone to landslides, and carbon emissions from the expected increase of truck traffic, have also angered environmental and local activists. Locals are also sceptical of government claims that CPEC will reduce high rates of unemployment, suspecting that most jobs will go to outsiders from Punjab and Khyber Pakhtunkhwa, which could also affect Gilgit-Baltistan’s delicate Sunni-Shia demographic balance.

 While the last government’s hasty, flawed reforms have aggravated longstanding grievances in Gilgit-Baltistan, anti-Chinese sentiment also is on the rise. 

Instead of addressing such concerns, authorities have regularly invoked the 1997 Anti-Terrorism Act and the 2016 cybercrimes law against political party and human rights activists. Intelligence officials have warned local journalists in Gilgit-Baltistan against criticising CPEC. Officials accuse Indian intelligence agencies of trying to stir up anti-state sentiment in the region, implying that dissidents and protesters are Indian spies, contributing to a generally restrictive environment where criticism of CPEC is especially fraught. Replicating familiar conspiracy theories about Indian sabotage, in February 2018, the federal Interior Ministry notified Gilgit-Baltistan’s Home Department of alleged Indian plans to use Muslim recruits trained in Afghanistan to attack CPEC installations on the Karakoram highway and other routes. This allegation provoked heightened security measures and stricter monitoring of foreigners and visiting Pakistanis, including searches in hotels and guesthouses, and more patrolling of the route and exit and entry points.

Tensions with Islamabad have also risen as the result of the May 2018 promulgation of the Gilgit-Baltistan Order 2018, with the Pakistani prime minister retaining significant authority, with only some powers delegated to a council headed by an appointed governor to the elected Gilgit-Baltistan legislative assembly. In ongoing protests throughout the region, thousands of its inhabitants are demanding full democratic rights and representation. Protesters have regularly clashed with police, who have used tear gas and shot in the air to disperse crowds. According to a former senator, locals ask why CPEC passes through their region when Islamabad denies them fundamental rights.

While the last government’s hasty, flawed reforms, with limited local buy-in, have aggravated longstanding grievances in Gilgit-Baltistan, anti-Chinese sentiment also is on the rise. In 2016, China detained around 50 Chinese Uighur women married to Gilgit-Baltistan residents, reportedly on suspicions of links to Islamist militants in Xinjiang; the Gilgit-Baltistan legislative assembly has urged the federal government to work for their release, though as yet to no apparent avail. Asked about their detention, Chinese Ambassador Yao Jing said, “the women are being interrogated as Chinese citizens”. These actions will likely further fuel local alienation from both Islamabad and Beijing, with inevitable implications for CPEC.

CPEC’s Gilgit-Baltistan component also has geopolitical implications. India claims the region as part of its Jammu and Kashmir territory, rejecting Pakistan’s cession of part of the region to China under the 1963 border agreement. Former Indian Foreign Secretary S. Jaishankar argued, “China is very sensitive about its sovereignty. The economic corridor passes through an illegal territory”. Indian Prime Minister Narendra Modi contended, “connectivity in itself cannot override or undermine the sovereignty of other nations”.Beijing seems sensitive to these concerns, but equivocates. Briefing a visiting Pakistani media delegation, a Chinese foreign ministry official said, “India’s accusation of Chinese occupation of any part of Kashmir is baseless”. Yet in a pointed reference to tense relations between Pakistan and India, he also said, “the CPEC is neither the way to achieve political aims nor to be used in regional conflicts”.

C.CPEC’s Entry Point: Gwadar

1.Developing Gwadar

Purchased by Pakistan from Oman in 1958, Gwadar is a fishing town on the Arabian Sea not far from the Iranian border. General Pervez Musharraf’s military regime (1999-2008) sought assistance from China and other countries to develop the town into a modern deep-sea port, along with a master plan for refineries, power plants and industrial estates. The Port of Singapore Authority assumed control over Gwadar port in January 2007, and inaugurated it in March that year. Yet because of a mix of insecurity in Balochistan, nationwide political instability and economic crises – all largely the result of the regime’s policies – none of the elements of the master plan materialised.

In February 2013, Pakistan transferred leasing rights from the Port of Singapore Authority to the China Overseas Port Holding Company-Pakistan. Gwadar subsequently became integral to CPEC, with proposed energy pipelines, and road and rail links connecting it to China’s Xinjiang province through Gilgit-Baltistan via the Karakoram highway, aimed at turning it into a bustling commercial hub.

In a November 2017 briefing to the Senate, Hasil Bizenjo, then federal minister for ports and fisheries, confirmed that China would receive 91 per cent of Gwadar port-generated profits over 40 years and the Gwadar Port Authority, controlled by the federal government, the remaining 9 per cent; Balochistan’s provincial government would get nothing.The Port of Singapore Authority, the previous Gwadar port operator, had the same lopsided terms but many local officials and business community representatives believed that Islamabad should have renegotiated them with the Chinese operator. “As details emerge, there is more alarm about how much CPEC actually offers Balochistan”, said an expert with deep knowledge of Gwadar.

In November 2015, the China Overseas Ports Holding Company-Pakistan assumed control over Gwadar’s free trade zone. A prominent Karachi-based financial sector representative said this change would disadvantage Pakistani businesses: “If I want to set up a factory there, I would have to approach a Chinese manager”. In November 2017, Beijing asked for its currency, the renminbi, be given legal tender in Gwadar’s free trade zone, which Pakistan rejected.

 Several local officials complained that the existing plants benefit the port, not the city’s residents. 

Gwadar suffers from acute water and electricity shortages, major challenges to transforming it into a commercial hub. Iran exports electricity to Gwadar, but outages can extend up to ten hours a day.With pipelines running dry, privately owned tankers supply water at high prices. The Mirani dam in Kech/Turbat to Gwadar’s north, inaugurated in 2008, is meant to irrigate some 30,000 acres but instead is being used to channel water to Gwadar, provoking resentment in Turbat, already a hub of Baloch dissent, with regular clashes between Baloch insurgents and the military. Attacks on tankers carrying water from the dam to Gwadar have provoked strikes by owners and drivers and strikes in thirsty Gwadar’s markets and businesses. Two desalination plants have been built with Chinese support in Gwadar, and the military intends to build another. Yet several local officials complained that the existing plants benefit the port, not the city’s residents. A resident said: “They say that Gwadar will be a major hub of industry; for the people who live here, it is Karbala”.

Gwadar’s apparently limited commercial potential is raising suspicions about China’s real intentions. Some Pakistani security analysts believe that China is less interested in developing a road and logistical network that would enable access to the Arabian Sea and Persian Gulf from Xinjiang via Gwadar than in using the port for military purposes. One analyst wrote, “Gwadar will be a critical addition to Beijing’s so-called string of pearls: a ring of ports around the Indian Ocean, including in Sri Lanka, Djibouti and the Seychelles, which are intended to outflank China’s nuclear-armed rival for supremacy in Asia: India”. As it is, the ongoing militarisation of Balochistan’s coastal belt by the Pakistani army and navy, justified in part on the grounds of safeguarding CPEC assets, is holding back commercial activity in the district. “The cost of securing CPEC projects in Gwadar”, said a political economist, “could far exceed economic gains”.

2.Leaving Gwadar’s Communities Behind

Alienation is fast increasing as locals in Gwadar’s inner city fear their homes could become the first casualty of the CPEC port and free (trade) zone project. While the Gwadar city master plan has yet to be finalised, according to several Gwadar officials, the federal government plans to expropriate land, bulldoze the old city and resettle residents; it is already prohibiting the Gwadar Development Authority from allocating any funds for the inner city’s development. A senior Gwadar official said, “right now, the idea that residents will be forced out is not a myth”.

A federal government directive to the development authority to stop approving new housing and commercial developments until the master plan is finalised came after 103 housing schemes had already been approved, with some 100 private firms acquiring 14,500 acres of land. The navy has launched its housing scheme on some of the most attractive land overlooking Gwadar’s east and west bays, and speculators and developers are pushing property prices out of reach for locals.

A state-led land expropriation is now underway in and around Gwadar under the 1894 Land Acquisition Act, including over 2,200 acres for CPEC’s free trade zone, with an estimated 290,000 acres of land required for Gwadar city and 160,000 acres for residential purposes. An urban planner and expert on Balochistan said: “No consultation on land use has been held, even with local officials, not even a cosmetic consultation”. Landowners say properties have been expropriated without advance notice as required under the Land Acquisition Act.

As local alienation increases, so does security surveillance and control. Several intelligence agencies monitor movement within and around the city. Residents, even local officials, are subjected to frequent and demeaning questioning by soldiers at checkpoints. Even children are not exempt. A schoolgirl said: “CPEC has given us nothing; we can’t even walk freely in our own city”. A Gwadar official added, “the plan seems to be to make life so miserable for the residents that they leave on their own”.

 Resistance is unlikely to halt the development of [Gwadar] port, but the cost of ignoring it would be further local alienation. 

Instead of improving the lives of locals, CPEC’s presence is depriving them of their livelihoods. According to a Baloch analyst: “Around 70-80 per cent of the locals there are dependent on fishing, and at the moment they fear being crushed under the weight of the CPEC flagship”. Local fisher folk and other stakeholders say the project will close Gwadar’s jetty. Fisher folk, whose daily catch provides them just enough to feed their families, already have been denied access to the sea for days on end on security grounds. During the Gwadar Expo in the free trade zone in January 2018, boats were beached for three days during a critical season of calm waters.Fishing communities are also being relocated to nearby fishing areas along the coast, such as Sur Bandar, with some resisting pressure to move. In the long run, such resistance is unlikely to halt the development of the port, but the cost of ignoring it would be further local alienation.

Locals also resent exclusion from employment in the port and in construction. Many criticise the military-run Frontier Works Organization, which dominates construction contracts in Balochistan and elsewhere, for using labour from central and northern Punjab. A former senior Balochistan official said, “everyone sees the Baloch as uneducated so they won’t invest in them”. Although some programs are underway to train and employ locals, the backlash against CPEC in Balochistan is already apparent.If Baloch unskilled and semi-skilled workers are deprived of the benefits of the planned mega-development in Gwadar, Baloch insurgents potentially could expand their outreach and appeal by recruiting such workers.

3.Gwadar and the Baloch Insurgency

Over the past two decades, Baloch alienation has reached new heights. During Musharraf’s regime (1999-2008), the military and paramilitary Frontier Corps attempted to suppress Baloch dissent, abducting, torturing and killing hundreds, if not thousands, of Baloch nationalists and sympathisers. Even after the restoration of democracy, torture, enforced disappearances and extrajudicial killings continue unabated. In mid-2017, a major monthly commented that the “security forces’ scorched-earth tactics” seem to have pushed more youth “to take up arms against the state”, joining the ranks of insurgents fighting for Baloch rights.

The state has made few attempts to address Baloch calls for greater political and economic autonomy, which underpin the insurgency. It has also failed to prevent various jihadist groups, including Lashkar-e-Jhangvi and Lashkar-e-Tayyaba/Jamaat-ud-Dawa, from expanding their presence in Balochistan. As such groups expand their presence, Chinese nationals could soon become high-value targets, as demonstrated by the 2017 abduction and killing of two Chinese Christian missionaries in Quetta.

A prominent political economist said: “The military’s response to discontent in Balochistan is extremely heavy-handed”.Balochistan’s militarisation – the army’s southern command is de facto the supreme authority in the province, sidelining an already dysfunctional civilian administration – has imposed enormous pressures on local populations. Those populations are also threatened by Baloch militants. “If anyone cooperates with the military, if anyone shares information with them, the militants interrogate them and attack them. Many have ended up fleeing to Karachi”, said an informed observer.

With animosity toward Islamabad heightening, Baloch insurgent groups such as the Baloch Liberation Army have condemned CPEC projects as another attempt by the state to exploit Balochistan’s resources while giving little back to the province and its citizens. “Anywhere the Chinese are working will be perceived as a CPEC project and could hence be subject to attack”, said Kaiser Bengali, a prominent economist and former senior adviser to the Balochistan government.

Baloch militants have killed scores of Pakistani workers employed on CPEC projects, including three labourers in Turbat district working for the military-run Frontier Works Organization on the Gwadar-Quetta highway in May 2017, and ten construction workers in Gwadar earlier the same month, also working on CPEC road projects. “Though the Baloch insurgents are not strong enough to counter an overwhelming military presence”, an analyst said, “these attacks are a message to the Chinese that the state will not always be able to protect them”.

Frequent killings of police and paramilitary personnel – by both Baloch insurgents and jihadist groups – including in normally safe areas such as the provincial capital Quetta, have raised questions about whether the state, even with a heavy military and paramilitary presence, can maintain security. Even if such attacks do not deter Chinese enterprises, they could be used to justify an even greater security presence, which, in turn, would risk feeding Baloch dissent and fuelling the insurgency.

V.Punjab and Sindh: Land Grab in the Heartland?

The CPEC Long-Term Plan outlined a focus on agricultural modernisation, setting as goals, among others, “to strengthen agricultural construction” and “to promote the systematic, large-scale, standardised and intensified construction of agricultural industry”. These aspirations dovetail with Islamabad’s pleas to Beijing to encourage Pakistani food imports as one way to mitigate a sizeable trade imbalance. A Lahore-based agriculturalist and food business representative, who was close to the PML-N government, said that Pakistani land and labour would be used, with Chinese enterprises introducing better technology and marketing efforts. “We currently meet 7 per cent of the world’s food needs”, he said. “We could be meeting 20 to 25 per cent”.

While CPEC advocates expect that Pakistan’s “untapped agricultural potential” can be realised through such cooperation with China, there is still little clarity about CPEC’s agricultural component. “What has the government promised the Chinese in this sector?” queried a political economist. Moreover, CPEC’s focus on agricultural development could result in opposition similar to that in Gwadar in other parts of the country, including in the Punjab heartland and Sindh, where most land is privately owned. Chinese agricultural projects in Central Asia have sparked protests over agricultural deals and reforms perceived as friendly to Chinese enterprises. The same could occur in Pakistan.

A.Agricultural Cooperation: Punjab’s Challenges

Any ambitious agricultural modernisation project will require the acquisition and consolidation of large tracts of cultivated or cultivable land but such state-owned lands are in short supply. Small farmers own much of central Punjab’s cultivated agricultural land, the most fertile in the country. There are large private landholdings in southern Punjab and Sindh but these are the currency of political fortunes; landowners would risk losing political influence should they sell up. An analyst noted: “Many of these landlords won’t be able to get elected to a local body if they sell”.

One model, a high-level Punjab official said, could entail purchasing smaller farmers’ properties and leasing them back, while guaranteeing the supply of high-quality seeds, low-cost fertiliser and agricultural machinery, as well as good prices for their crops, thus reducing the risks of landlessness and displacement. The lure of cash compensation might convince many to sell their lands and/or accept relocation. But the availability of such land, and the provision of quality inputs and guaranteed prices, could attract entrepreneurs seeking to maximise profits in a short timeframe with little interest in the long-term viability of such projects.

Large-scale displacement and dispossession, were they to accompany CPEC agricultural projects, would increase social and political tensions. Tenant and small farmers have resisted past attempts by the state to deprive them of their land or their rights to cultivate it, a notable example being the mobilisation of tenant farmers on military-run farms in Punjab’s Okara district, a dispute that has lasted for years. Despite arrests and harassment, the Tenant Associations of Punjab (Anjuman Muzareen Punjab), spearheading the resistance, continues to fight for ownership rights for tenant farmers of lands claimed by the army. “If the state forces small farmers to sell”, said a human rights activist, “there will be local resistance and conflict”.

There are three broad categories of land ownership: individual; collective (ten or more owners); and land whose transfer or sale was not completed officially and whose ownership and property rights therefore are not clear. Tenants and farmers on land in the last category are particularly vulnerable to expulsion; according to activists, journalists, economists and other close observers, they will likely resist pressure by officials to vacate their lands. According to the Land Acquisition Act of 1894, under which the state can acquire land “needed for a public purpose or for a Company”, compensation is only given to formal owners of land, and excludes tenant farmers and those without deeds. Absent measures that recognise the right to compensation of tenant farmers and those lacking formal ownership documentation, whether through legal reform or, in its absence, executive decision, lands acquired for CPEC projects under the 1894 act could devastate pastoral communities. Given otherwise limited job opportunities and the inadequate shelter provided by the state, land dispossession will have a particularly adverse impact on women-led households.

A model home, February 2018.INTERNATIONALCRISISGROUP/2018

B.CPEC and Sindh’s Tharparkar District

Sindh’s impoverished Tharparkar district is the site of Pakistan’s largest coal mining and power project, now a high-profile element of CPEC. The CPEC envisages mining thirteen blocks, covering 9,000 sq km, and doing so will likely displace many locals. As speculators enter the property market, many locals also could sell their lands and join the ranks of the unemployed. This reliance on coal for power projects will also pose serious environmental risks.

One component of the Tharparkar mining and power project, run by a Pakistani multinational firm, provides a model for mitigating the disruptive effects of such development by giving locals stakes in the enterprise. The firm, which has the contract for one of the thirteen blocks, mainly employs locals on the mining site, with Chinese workers only providing technical expertise. It is building model villages, including homes, places of worship and markets, to resettle some 450 displaced families, and making long-term investments in skills development, training, jobs, education and health, including for women and girls. In a region with high maternal and child mortality, the company has set up a free health clinic for women, operated by a well-regarded hospital. Local women work for the mine, including as dump truck drivers and engineers.

The next mine to come online will be run and staffed by a Chinese company. A well-informed coal industry professional said that thus far the project envisages no guarantees of employment for locals and has involved limited consultation with communities potentially affected. The federal and provincial governments should develop a socially and economically responsible regulatory framework, including through local consultations and with input from civil society organisations, for all companies awarded contracts for coal mining and power projects in Tharparkar. That framework should include employment guarantees for locals, including women, mitigation of environmental damage and protection of local culture. Employing non-residents would provoke resentment and disrupt the region’s delicate religious, demographic and socio-cultural balance.

 Tharparkar is one of the few regions in Pakistan with a Hindu majority and has a sensitive location bordering India. 

Tharparkar is one of the few regions in Pakistan with a Hindu majority and has a sensitive location bordering India. As a result, locals claim, security agencies doubt their loyalty to the state. As in Gwadar and Gilgit-Baltistan, the security presence is overbearing, with agencies keeping a close eye on activists and others that question CPEC developments. In late 2016 and 2017, enforced disappearances of activists and journalists in the district became common. Some observers suspect that opposition to CPEC was a factor. A writer and researcher in Umerkot town said, “the intelligence agencies treat [the critics of CPEC] as their enemies”. A representative of a company working in Tharparkar added, “the security presence in the region is already overbearing. In this atmosphere of intimidation and fear, locals do not dare openly criticise any CPEC project”. Stifling democratic debate could result in anti-CPEC sentiments assuming a far more hostile form in the future.

VI.Conclusion

If properly carried out, CPEC could promote economic development and growth and thus have a profound impact on Pakistan and its citizens. Yet, as a high-profile business representative rightly warned, “if there are opportunities, there are also serious risks”. Unless there is a serious rethink in policy circles, CPEC could inflame tensions between the centre and federal units, and could trigger or worsen conflict within provinces.

To avoid such outcomes, Pakistan’s CPEC projects and programs should be guided by diligent planning and policy. Islamabad should determine the direction of Pakistan’s CPEC policy, based on its – and not Beijing’s – economic and political interests. It should place CPEC in the context of a broader strategic vision for modernising its economy in ways that do not destabilise the polity.

The best chances for the country’s stability – and indeed CPEC’s success for Pakistan and, by extension, China – lie in giving provinces and communities a voice in shaping CPEC projects and thus helping promote local buy-in. Rather than suppressing criticism and dissent, the federal and provincial governments, as well as the security institutions, should recognise that the viability of CPEC projects rests on stakeholder ownership. Unequal prosperity, favouring outsiders over local communities, would aggravate social and political divides, fuelling tension and potentially conflict.

Beijing and Chinese companies face a steep learning curve with CPEC, but many problems could be mitigated through consulting and engaging the full spectrum of Pakistani stakeholders, from competing elites to the grassroots, and conducting comprehensive risk and political analysis to balance competing priorities. Efforts to ensure benefits are shared equitably need to be complemented by effective and extensive communication to illustrate common interests.

As Pakistan’s democratic transition approaches another milestone, with a second consecutive elected government completing a full term and a successor assuming power in August 2018, the new parliament should seize the opportunities of a fresh mandate by shaping public debate on CPEC, and informing government policy. That policy should have the well-being of Pakistani citizens at its heart, rather than treating it as something that can be negotiated away in the pursuit of mega-development or perceived strategic interests.

Brussels, 29 June 2018

Appendix A: Map of CPEC Special Economic Zones

Map of CPEC Special Economic ZonesInternational Crisis Group

Appendix B: Acronyms

ANP                       Awami Nationalist Party

CPEC                     China-Pakistan Economic Corridor

ETIM                     East Turkestan Islamic Movement

FATA                     Federally Administered Tribal Areas

FATF                     Financial Action Task Force

FTA                        Free Trade Agreement

GDA                       Gwadar Development Authority

IMF                        International Monetary Fund

JUI-F                    Jamiat Ulema-e-Islam (Fazlur-Rehman)

PML-N                  Pakistan Muslim League-Nawaz

SEZ                        Special Economic Zone


https://www.crisisgroup.org/asia/south-asia/pakistan/297-china-pakistan-economic-corridor-opportunities-and-risks

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