By Irshad Salim
Forbes recently published an article “China’s Hambantota Deal Is Bad News For Both Pakistan And India”, authored by Panos Mourdoukoutas. It drew my attention, and suffice it to say, it’s well written. However, realism check of its micro details lead me to think that an apple and orange comparison may have been unintentionally made.
If looked at strictly from geopolitics prism, the author has done well to sound off futuristic scenario on a worst case basis. However, financial modelling assumptions the author has pegged his argument on to compare Hambantota deal with Gwadar port, and by extension the $62 billion China Pakistan Economic Corridor (CPEC), may not be linearly compatible.
Here’s my two cents:
Pakistan had signed a 40-year agreement with China for the operation and maintenance of Gwadar port on the Arabian Sea shoreline in Balochistan province.
Under the agreement, China would carry out all peripheral development work on the port as and when needed, including future expansion if warranted.
The cost of building the port is not part of the China Pakistan Economic Corridor nor has it been dovetailed into it as the loan precedes CPEC. The port’s tertiary development may be funded through the $62 billion CPEC package, according to reports.
The Gwadar international airport — complementing the peripheral economic development around the port is being built from Chinese Grant — meaning that its not a loan.
As per the port concession agreement, China Overseas Port Holding Company has a 91% share in the gross revenue of the terminal and marine operations and 85% share in gross revenue from operations of the Gwadar free zone. Provinces have no share in revenue collection from the port operation as per the current constitution.
The legal and financial modeling of the port is a mixed bag of geo-economics and geo-strategic. Also, the port loan is not so large as compared to other elements of CPEC –that it would burden the repayment schedule spanning upto 40 years.
In contrast, Sri Lanka’s Hambantota port deal has been and remains geo-economics. Kankan government borrowed soft loan from China for building the port and expected that it would pay back from its operation — the effort ran into problems due to local politics and geopolitical constraints.
The Hambantota loan as per the agreement to begin with, was convertible to equity by mutual consent in case of encumbrances or default– a commercial practice followed worldwide. China and Lanka choose to exercise their rights with mutual consent (and not under pressure) after Lanka failed to reschedule the loan or seek bridge-loan or replaceable loans from international agencies. India offered but Lanka turned it down for geopolitical reasons.
Therefore, to assume that the Hambantota model and its consequences would or could apply to Gwadar would be ignoring its financial model, strategic elements and its comparable loan size vis-a-vis other loans in the total CPEC package.
‘Taking over of Hambantota by Beijing’ is therefore not a bad news for Pakistan as the report suggests.
Hambantota port has been leased to China for 99 years, suggesting a longer payback time due to loan-size and revenue-size tradeoff analysis (In Gwadar it’s 40 years). That’s according to a landmark agreement signed between Lanak and China early last week amid concerns from some international players — the deal gives China Merchants Ports Holdings—an arm of the Chinese government–70 percent stake in the Indian Ocean’s prominent outpost.
For Pakistan, the deal does not serve as a model for the future of CPEC (China–Pakistan Economic Corridor), as the said report suggests.
CPEC was jump-started with soft loans and supplier’s credits, etc. that will not be converted into equity, as it seems very likely Pakistan will be in a position to pay them back earlier than envisaged in their financial modelings with a caveat, according to some analysts: Pakistan’s ability to pay interim costs such as import of machinery, interests, insurances, fees, etc. payable during the projects delivery cycles– a scenario covered under “strategic investments” line-item according to some experts.
Therefore, Forbes’ observation that: “…investors in the region have chosen to focus more on market fundamentals rather than on the geopolitics of the region, driving shares…higher (in Pakistan) recently,” is a good fit to describe Pakistan’s opportunities and a mitigating element for the challenges it faces now.
The mathematical modeling of CPEC finance and its emerging economy –if looked at through Pakistan’s lens, is becoming investors’ paradise –regional players are willing to invest (not provide loan) in it and its downstream projects whose total value may very well exceed the Chinese loans.