The China Pakistan Economic Corridor — with an outlay of $54bn — entails an FDI inflow that is more than the cumulative net FDI inflows of the country.

An extension of China’s ambitious One Belt One Road (OBOR) initiative, the CPEC has three major components — an economic corridor comprising a network of highways, railways, pipelines and optical fibre, energy generation and distribution infrastructure, and Special Economic Zones (SEZs).

The sheer size of the project, however propitious it might appear, is fraught with uncertainties. Therefore a dispassionate analysis is required to capitalise on opportunities and mitigate risks.

First, development of road, rail and port infrastructure will reduce the infrastructure deficit that is currently hampering linking the production base with domestic and foreign markets. Internal connectivity increases competitiveness by decreasing internal transportation costs, reducing post-production losses and facilitating optimal industry relocation.

The development of infrastructure under the CPEC will also help rectify Pakistan’s suboptimal regional integration. As trade naturally gravitates into the region due to a similarity in consumption patterns, short delivery times and low transportation costs, the country can finally garner economic benefits from its geographical location — being at the crossroads of Central, West and South Asia.

Connectivity will also increase physical access to the huge Chinese market. The challenging part, however, is that connectivity is two-way — it offers at least as much advantage of physical market access and lower delivery costs to Chinese products in Pakistan as vice versa.

A highly competitive Chinese industry with improved connectivity will further strain Pakistan’s domestic industry, already reeling under the pressure of the China-Pakistan Free Trade Agreement.

Second, development of energy infrastructure will relieve the persistent energy shortages which shave an estimated 2pc off from GDP growth every year. The addition of nearly 10,400MW in energy generation capacity till 2018, under the Early Harvest Projects, will improve the export sector’s access to energy and is estimated to add 2-3pc growth in exports.

However, the cost of energy under the CPEC in the long term will remain a challenge. On one hand, immediate investment is required to bridge the demand-supply gap in energy and on the other hand, the developing renewable energy technology is fast reducing the energy prices.

For instance, the prices of solar energy dropped by 50pc in 16 months till May 2016 when Dubai Electricity and Water Authority received a bid of 3cents per KWH for 800MW electricity. Long-term binding buy-back contracts with energy producers, therefore, need to be avoided.

Third, partnering with China, the world’s export juggernaut, offers the opportunity of integration into Chinese value chains by piggybacking on the Chinese export industry.

In a natural cycle of industrial development, the Chinese manufacturing sector — due to increasing labour costs — has already been moving up the value chain by limiting itself to high-tech manufacturing services, while outsourcing medium and low-tech activities to countries like Pakistan and Bangladesh.

The medium to low-tech Chinese manufacturing industry can be attracted to relocate to Pakistan. They bring with them export market linkages and their existing integration into GVCs besides the spillover benefits of technology transfer, development of skilled workforce and snowballing of FDI from other countries.

Lastly, Pakistan can benefit from the Chinese experience of developing the SEZs as competitive export production hubs with allied infrastructure and formation of human capital.

Though the details of the SEZs under the CPEC have not been finalised yet, such zones are envisioned as the instruments to attract investment through a package of incentives and policy interventions.

Such incentives, though essential to attract investment, have a flip side — the provision of excessive incentives to industries in SEZs may cannibalise the mainstream export-oriented industry that is already struggling in an environment ranked dismally low in indicators of competitiveness, ease of doing business and governance.

The industries based in the ‘golden industrial triangle’ have vociferously expressed their anxiety.

It is also apprehended that the SEZs, instead of becoming production hubs, may turn into warehouses of Chinese products. In case Chinese products are allowed duty-free warehousing in the zones for subsequent export to tariff areas of Pakistan, it would give them an unfair advantage over domestically produced goods which have to pay taxes immediately on entry into the distribution chain, thereby increasing their cost of doing business.

To conclude, the CPEC is termed as a game changer as it has the potential to change the rules of economic engagement in the region. Therefore, it is imperative that we carefully strategise to ensure that the changed rules don’t knock us out of the game.

The buy-back arrangements of energy should be carefully crafted to maintain a balance between access to energy in the short term and cost of energy in the long term; SEZs should be designed to integrate with the country’s economic structure rather than sidestepping the inefficiencies of the mainstream economic environment; a coherent strategy be implemented to leverage enhanced connectivity for integration into the Chinese and global value chains, and the focus remain on improving the enabling economic environment in the country — at least as much as on designing the SEZ incentive structure.

Public policy has to be alive and vigilant to channelise investment inflow for productive advantage.

—The writer is joint secretary (Exim), ministry of commerce

Published in Dawn, Business & Finance weekly, January 30th, 2017