Volumes elusive at Gwadar but mammoth project work continues

Trucks at Gwadar port. Credit: Dost Pakistan



Last month the prime minister of Pakistan, Nawaz Sharif, led a ceremony to mark the first large consignment of goods to travel overland from China and be shipped out from the port of Gwadar in the southwest of the country. The shipment of 160 containers bound for Colombo and Dubai was intended to represent the beginning of a major new overland trade route linking China with the Indian Ocean and the markets of the Arabian Gulf.

Gwadar port in the volatile province of Balochistan is the hub of the China Pakistan Economic Corridor (CPEC), a set of infrastructure projects costing USD4 4.5 billion and the highest profile undertaking of China’s One Belt One Road programme.  

In addition to port infrastructure, the corridor includes a 3,000 km network of highways and railways from western China running down the full length of Pakistan as far as the sea and a series of energy projects including solar, wind, and coal-fired power stations. According to the International Monetary Fund (IMF), USD44.5 billion was equivalent to 16% of Pakistan’s total gross domestic product (GDP) in 2015-2016.

China took over work at Gwadar in 2013 after Singapore’s PSA International pulled out of a 40-year agreement to develop the port because of security concerns and problems making the project a commercial success. A key issue was the failure of the Pakistan navy to transfer land to the Singaporean company for the development of a planned 584 hectare free trade zone seen as essential to the commercial success of the overall project.

State-owned China Overseas Port Holding Company (COPHC) is leading the development work at the port and adjacent special economic zone. The project, which Chinese media says is costing USD1.62 billion, is due to be completed by 2020 and includes four container berths over 3.2 km of shoreline; a bulk cargo terminal with capacity to handle vessels of 100,000 dwt; a grain terminal; ro-ro terminal; two oil terminals with capacity to handle vessels up to 200,000 dwt and a floating LNG terminal with capacity of 500 million cubic feet of gas per day.  

A coal-fired power plant, 152 hectare special economic zone and expressway are also being built. The approach channel is being dredged to 14 m from an initial 11.5 m with plans to eventually deepen it to 20 m.

The long-term plan is for the port to have more than 100 berths and handle over 400 million tonnes of cargo per year by 2045.

Under the original development masterplan, the port was to handle about 100 million tonnes of cargo in 2017 but it is nowhere near achieving that. Just one mainline shipping company, China COSCO Shipping, currently serves the port, mostly carrying construction materials for CPEC and other large infrastructure projects, as well as some locally produced exports.

“It was originally developed as a military port and then moved more into a commercial entity,” said Richard Butcher, global head and director of ports and terminals at Wipro Technologies. “It’s always been a tricky facility to manage, with [Singapore] initially agreeing to run and manage it, but they had problems turning it into a commercial success.”  

Cargo sources

Both Pakistan and China are convinced of the commercial potential of the port and have identified several major sources of cargo they say will drive growth to levels that justify the scale of the project.   

The port is expected to handle increasing volumes of exports from the Balochistan region, including chrome ore, iron ore, marble, and sea-food. It is also expected to take gateway volumes from other parts of the country as the limitations of Pakistan’s two other international deep-sea ports of Karachi and Port Qasim start to show.

Located within the city of Karachi itself, the port of Karachi has limited capacity to expand; while Port Qasim, Pakistan’s second largest port at which DP World operates a container terminal, is limited by its location about 40 km inland from the open sea.

A major objective is for the port to become a hub for oil shipments to China. Two oil terminals capable of handling 200,000 dwt tankers are being constructed to handle a growing portion of the huge quantities of oil the world’s second largest economy buys from the Middle East. About 60% of China’s total oil imports come from the region and shipments via Gwadar and then overland to China will cut transit distance by well over a third compared with existing routes as well as reduce overreliance on the Malacca Strait.

“[This would be] via a pipeline to connect from Gwadar to China’s western border, allowing a direct link for oil imports. China sees Gwadar as a warm-water port very close to its supply lines,” said Shailesh Garg, a New Delhi-based analyst with Drewry Maritime Consultants.

Trade via CPEC routes

Symbolised by the recent ceremony at the port, the main source of throughput over the medium- to long-term is expected to be goods originating in China bound for EU, US, and Arabian Gulf markets after traveling overland to the port mostly on CPEC transport infrastructure.

Shipments to and from countries in Central Asia as well as Iran and Russia are also expected as the new transport route drives development of mineral resource and other industries.

According to William Hall, an analyst with Seaport Consultants in the US, this is easier said than done. “Reliable inland connectivity with China remains a major issue given recent infrastructure failures and regional political instability,” he notes.

Hall believes much of the success of the facility will depend on the interactions between the port and nearby industrial zones, and in particular whether recent tax policies aimed at boosting investment in the zones as well as shipment volumes have the intended effect.

“Much will depend on the nature of these developments and the degree to which their activities require reliable long distance road and sea transport.”

Introduced earlier this year by the Pakistani cabinet, the tax breaks are extensive and in themselves an indication of urgency on the part of both governments to see project start to bear some commercial fruit.

To help secure the continued development of the planned infrastructure, the tax breaks include exemption for the Chinese developer, its subsidiaries and contractors, from Pakistan’s minimum income tax as well as the 12.5% tax on divided income. The companies do not have to pay any customs duty for a period of 40 years on import of equipment, materials, plants, machinery, appliances, and accessories used for development of the port and free zone, as well as duty on the import of bunkers and vehicles.

Security concerns

Successfully dealing with severe security concerns will be a major factor in building volumes at the port. Baluchistan is home to an ethnic nationalist insurgency as well as operations by sectarian militants with links to Islamic State. The day before the ceremony to celebrate the shipment of Chinese containers, a bomb in another part of the province killed over 50 people in an attack claimed by Islamic State.

Pakistan has deployed a dedicated 10,000-strong security force to protect the CPEC projects and the port. The force includes a brigade of more than 500 troops to guard workers and Chinese employees and to escort trucks carrying goods through Balochistan.

While the commercial success of the facility remains elusive, its strategic importance for both countries is very clear. Pakistan needs the investment in infrastructure as well as the substantial boost to the economy of the multibillion dollar CPEC investments, more than 90% of which is coming from Chinese banks.  

The IMF estimates CPEC-related capital inflows including foreign direct investment and external borrowing could account for 2.2% of GDP and 11% of total imports by 2020. The specific investment in Gwadar port is also welcomed as a huge industrial investment and job-creating effort in one of the least developed and volatile regions of the country.

For China, Gwadar and the CPEC offers a shorter route for trade exports and oil imports, while crucially avoiding the Strait of Malacca. Greater political influence and naval presence in the Indian Ocean is also a major goal.

China is well known for its commitment to long-term planning. It is clear that for it and for Pakistan, for the time being at least, the long-term strategic importance of Gwadar and the associated CPEC projects are trumping any immediate commercial concerns.

Contact Turloch Mooney at turloch.mooney@ihs.com and Peter Shaw-Smith