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April 15, 2017

Broader benefits


April 15, 2017

Ever since the CPEC has been launched and implemented, questions have been raised on the nature of Chinese investment. A sizeable portion of the critique has, in particular, been reserved for the nature of investment in the Orange Line Metro project, among other things.

The commentary, barring a few exceptions, not only betrays the lack of understanding with regard to CPEC projects, but also contains unfounded assertions. As far as the investment in the power sector under CPEC is concerned, Chinese companies are making investment in the Pakistan’s power sector in line with the pre-determined norms of the existing power policies and regulatory framework.

This is a foreign investment where the risk and responsibility of arranging equity and debt rests solely with the investor. The power generation tariff is determined by Nepra and notified by the Federal Ministry of Water and Power. It is available to all investors who provide a standardised pay-back mechanism for this investment to the concerned project sponsors.

This mechanism is also applicable to Chinese companies without any special treatment. The power projects, later, enter into an agreement with the Central Power Purchasing Agency (Guaranteed) Limited (CCPA). The CCPA’s payment obligations under the PPA are backed by a sovereign guarantee on behalf of the government of Pakistan. This regime is available to all power sector investors, including those investing in CPEC power projects.

The government of Pakistan, from time to time, issues policies that describe the terms and conditions for investment in the power generation sector. These policies provide specific financial and fiscal incentives to private power producers without any discrimination to the country of origin. Furthermore, Nepra determines the generation tariffs in line with the policy incentives approved by the government of Pakistan.

With regard to the Orange Line Metro project, the government of Punjab has acquired a soft loan to the tune of $1,626 million from the Exim Bank of China through the government of Pakistan. This loan will be primarily used for E&M works, civil works and consultancy charges. It is also an investment in Punjab’s economy to provide the basic infrastructure to meet the transportation needs of the public. The Orange Line Metro project is being executed because of its strong economic benefits realised from the vehicle operating costs (VOC) savings and passenger travel time savings.

Lahore is the second largest city of the country. The Orange Line Metro project is the first urban metro train project that is being executed in Lahore. It also happens to be the first urban metro train project in the country. In the interest of achieving balanced growth and development, this project cannot be criticised on account of inter-sectoral priorities issue. In fact, it is a high-priority project which ideally should have been executed a long time ago. The government of Punjab has ensured the procurement of the Orange Line Metro project in a transparent manner that further resulted in savings of $661 Million.

Even though the Chinese assistance for this project was tied, the government of Punjab was able to resort to the tendering for the first time in such projects. This is primarily in the interest of transparency. It also needs to be taken into consideration that civil works of this project were assigned to Pakistan for the first time in the history of the execution of such infrastructure-related projects. The Lahore Development Authority – which is the executing agency of the project – hired the services of civil contractors in a transparent manner that saved Rs6 billion.

A majority of CPEC-related investment are on a BOT basis. This way, Pakistan need not repay the loan in cash. However, the Chinese will keep the revenues from the CPEC projects for x number of years until the time the project has paid back the principal amount in addition to the pre-determined interest. This is a win-win situation for both China and Pakistan. This is how the Koreans built the Lahore-Islamabad Motorway for us.

The benefits of CPEC should not just be seen in terms of asset creation. The dynamic benefits in terms of regional cooperation – particularly regional trade and investment – with Central and South Asia should also be accounted for.


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