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The impact of CPEC on the logistics and transport sector in Pakistan

Pakistan has always stressed the need of a world class logistics and transport infrastructure for the speedy movement of goods and business in the region of Economic Cooperation Organization (ECO) and since the ECO is the formation for the boost of Central Asian countries trade and within its limited markets and export prospects China-Pakistan Economic Corridor (CPEC) is a major initiative that would help achieve the core objectives of ECO. The CPEC is anticipated as a game-changer not only in Pakistan-China economic context but it would also complement the economies of the entire neighborhood, especially the ECO region.

In transport and storage, the recently unveiled China’s One Belt One Road (OBOR) plan aims to build a nationwide logistics network, and enlarge the warehousing and distribution network between major cities of Pakistan with a focus on grains, vegetables and fruits. Storage bases will be built first in Islamabad and Gwadar in the first phase, then Karachi, Lahore and another in Gwadar in the second phase, and between 2026-2030, Karachi, Lahore and Peshawar will each see another storage base. Due to lack of cold-chain logistics and processing facilities, 50% of agricultural products go stale during harvesting and transport. For agriculture, the OBOR plan outlines an engagement that runs from one end of the supply chain all the way to the other. Logistics companies will operate a large storage and transportation system for agrarian produce. Nine Special Economic Zones are being established along CPEC route where foreign companies can invest in factories, warehouses, logistic centers and much more for consumption in Pakistani market and export.

The plan also recommends that Pakistan develop auto and auto parts assembly industry due to the proximity of Karachi and its ports. Due to the introduction of CPEC in Pakistan, the demand of heavy vehicles is expected to grow quickly and manufacturers are flocking to Pakistan to capitalize on this. Volvo has already signaled its plans and now it has another competitor (MAN SE) vying for the same space.

CPEC has made a significant impact in Pakistan to revolutionize things. With a number of projects on-going and pending, heavy vehicles requirement is crucial. To meet these requirements, companies like NLC prefer to use imported trucks due to their high quality.

It is estimated that at least 100,000 additional trucks would be needed to transport construction materials, movement of export-import trade and increased volume of goods. If investment in the sub sector is not carried out well ahead of the CPEC projects’ peak load demand, the prices of trucking would escalate, putting Pakistani exports at a competitive disadvantage. The cost matrix of CPEC projects would also move upwards thus increasing the indirect costs. However, if Pakistani truck manufacturers are provided ballpark figures they can invest in expansion of existing capacity in tandem with the suppliers of parts and components. Indirect benefits would increase through creation of new jobs in the industry and efficiency gains from the economies of scale.

From the budget point of view, the rise in overall import payments is mainly driven by higher purchases of fuel and capital equipment. This is understandable given that Pakistan is transitioning from a low-growth to higher growth phase, and is addressing supply-side bottlenecks in energy and infrastructure. However, in the wake of rising oil prices internationally, the room available to finance rising non-oil imports (including that of power generation and construction-related machinery for CPEC projects), will now exert pressure on the external account.

There is little doubt that Pakistan direly needs massive investment in energy and transport infrastructure projects to cut blackouts, boost growth and create jobs. One of the reasons why the initial cost of the project swelled from $46 billion to $57 billion is because of the inclusion of Chinese financing for Pakistan Railways and transport projects in the provincial capitals of Sindh, Khyber-Pakhtunkhwa and Balochistan. While Beijing will pay for the larger part of the CPEC bill through commercial loans, soft loans, grants and private equity investment, Pakistan is also required to chip in funds for transport projects.

The CPEC could go a long way towards alleviating Pakistan’s long-standing supply-side bottlenecks, lifting its long-term potential output and improving power supply for exports. Transport infrastructure (roads, rail and port) will allow easier and low-cost access to domestic and overseas markets, promoting inter-regional and international merchandise trade. Services trade will also benefit from the increased trade traffic from China and the initiative would prove to be a catalyst for private business investment and boosting productivity.

There is considerable expectation that CPEC will catalyze broad-based acceleration. But CPEC cannot become our next medium-term development plan, which must have a wider canvas, including objectives for social and human indicators. But it can become the means by which internal productive capacity is regenerated across the industrial, agricultural and commercial sectors. If we are to reap benefits, we must galvanize the already delayed planning process for ancillary industry enabled by CPEC through public-private partnership.

The writer is a Karachi based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan

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