CPEC cannot be salvaged until it’s led by the private sector

In 2014, Pakistan’s Ministry of Planning and Development projected a $750 billion economy as part of Vision 2025. The China Pakistan Economic Corridor (CPEC) was the lynchpin of our strategy to reach this goal. Fast forward to 2023, our GDP is only $375 billion and CPEC is on life support. Why did the mega transformative project so spectacularly fail and how can it be revived?

Security concerns, the lack of capacity or financial malfeasance could be responsible for the stalling of CPEC. However, according to the London School of Economics, one of the largest recipients of Chinese FDI is the DR Congo, which persistently endures violence, governance and capacity constraints. Chinese are hardened operators and Pakistan is by no means an unmanageable territory for them. 

The primary reason is a frustrating lack of policy consistency and frequent changes in lead government bodies dealing with CPEC. In the previous PML-N government, the frontline executing agency switched from the PM Secretariat to the Planning Ministry to the Board of Investment (BOI). Each rotation brought in a fresh set of faces, starting with new policies. 

Governments are not built for the quick execution or the domain expertise needed for effectively implementing these projects. We must unleash the entrepreneurial talent of our people and the power of collaborative private enterprise to realize the opportunity of CPEC. 

- Malik Ahmad Jalal

The PTI government fared no better. In its tenure, CPEC rotated between BOI, Ministry of Planning and finally rested in a specially convened CPEC Authority. The popular thinking was that a single-window operation headed by a former military commander will overcome bureaucratic obstacles and re-start CPEC. Even that did not work.

At the heart of Pakistan’s misdirected CPEC efforts is a fundamentally flawed ideology that development is public sector led and executed. And that centralized bureaucracies can coordinate efficiently, and tenured protected bureaucrats are rightly incentivized for timely execution and have the skill set to deal with Chinese domain expertise.

Development is almost always public sector facilitated but private sector led. Especially complex multi-sectoral, multi-regional projects cannot be effectively executed by centralized bureaucracies – the collapse of the Soviet Union’s planned economy is an example. Large scale infra development or wealth creation – be it Chile, Japan, Taiwan, USA or post World War II Germany – had extensive private sector participation. Here are the three examples, which if replicated in Pakistan, can re-vitalize CPEC. 

South Korea was the poorer half of the country with an agrarian low skilled economy while North Korea was industrialized. General Park Chung Hee of South Korea was inspired by the Japanese business model of ‘Zaibatsu’ and used a combination of industrial cooperation with Japan, USAID development funds and state planning to foster home-grown entrepreneurship to industrialize his country. 

From the 1960s, the growth of ‘chaebols’ or conglomerates powered South Korean GDP per capita from $146 to $29,700 in 2020, led by visionary entrepreneurs like Mr. Chung Ju-yung, founder of Hyundai Heavy Industries. The chaebols developed sector expertise in shipbuilding, autos, semiconductors and formed business-to-business partnerships that made them globally competitive. Exports increased and building chaebols technical capabilities up-skilled the work force. It is estimated that Hyundai’s apprenticeship program benefitted 13 percent of South Koreans, leading to massive upward economic mobility.

The South Korea-Japan-USA collaborative development model can be replicated in CPEC to build industrial capability in our local enterprises which will fuel our economic growth. 

Saudi Aramco is now owned by the Saudi government, but it started in the 1930s as a public-private partnership between Standard Oil of California, Texas Co. and the Saudi government providing the oil exploration concession. It is a valuable case study of the private sector operating capability coupled with public sector facilitation, building a significant economic engine of growth. Aramco now has a $2 trillion valuation and annual profits of $161 billion. The Saudi government and its people are the beneficiaries of this private sector led development.

The third example of private sector led development is the Dutch East India Co. or VOC, which was licensed to explore the spice trade in Asia. VOC was a joint stock company with private management, shareholders and a class of shares held by the Dutch government. VOC is considered the most valuable company in the world’s history, valued at $7.8 trillion in today’s terms. VOC with 50,000 ships made the Dutch a sea-faring empire, Amsterdam a financial center and Rotterdam a shipping hub.

Our government must unshackle the private sector from the licensing stranglehold of the bureaucracy and encourage enterprises, especially emerging medium enterprises, to forge joint ventures with Chinese counterparts to transfer technology know-how and industrial capability into our local ventures. These local enterprises will become sector champions – like Samsung, LG and Hyundai — and export their capabilities abroad, earning more foreign exchange.

Reko Diq mining concession was negotiated between secretary mining of Balochistan province and sophisticated lawyers employed by Tethyan Copper Limited. The imbalance of expertise got Pakistan a substandard contract and a penalty of $5.9 billion. The real losers here are the people of Pakistan, as a mega development project could not happen due to bureaucratic lacking.

Governments are not built for the quick execution or the domain expertise needed for effectively implementing CPEC projects. State-led CPEC development will result in the same stunted outcome as before. Therefore, government involvement should be limited to providing smart incentives and a level playing field through regulations and oversight. The private sector has the right incentive and capability to negotiate competitively with the Chinese and create a win-win with them. Pakistan’s economic situation does not warrant another attempt on CPEC based on past methods – we must unleash the entrepreneurial talent of our people and the power of collaborative private enterprise to realize the opportunity of CPEC.

Malik Ahmad Jalal is a venture builder, a private equity investor and investment banker. Twitter: @AhmadJalal_1