China Builds a Port in Pakistan

Adding Gwadar to the String of Pearls?

The recent economic crisis all but sank the global shipping industry, but the tide of Chinese and Indian exports has begun to rise anew, lifting ships in related economies across South and Southeast Asia. Intra-Asian trade is increasing, as is consumption – and thus transport – of fossil fuels, particularly in China. Eighty percent of China’s oil imports flow through the narrow Straits of Malacca, treacherous and brimming with brigands. These factors have contributed to China’s pressing need for an expanded transshipment network in and around the Indian Ocean.

Enter Gwadar – a sleepy fishing village in southwest Pakistan with a deep-sea harbor that the government has been shopping to foreign investors for years. Since 2001 China has committed tens of billions of dollars to transforming Gwadar into a major port, which would become part of what some observers call its “string of pearls” – its littoral transportation, communication, and commercial assets across Asia and East Africa. China’s investment in Gwadar and elsewhere in the region has raised eyebrows among those concerned about its increasing regional economic dominance. But Gwadar may not be the play that cements China’s position as regional hegemon. Nearly three years after its official opening the port has yet to become fully operational.

Will Gwadar ever be fully functional? If so, what effect will it have on the Pakistani and Chinese economies? Is it likely to compete with existing transit hubs in Dubai, Singapore, or Mumbai? We asked our experts to explain the challenges facing the development of the port and its geopolitical significance.

Insights from the Ergo Network

• Expert 1: Leading Pakistan development analyst, expert in Balochistan issues

  Lack of investment in related infrastructure
  
  

  “For being strategically located outside the sensitive area of the Straits of Hormuz, Gwadar Port could play an important role in future containerized trade in Asia. However, Gwadar Port will take a long time in becoming fully operational. The port remained non-functional for more than one year even after its official opening in March 2007. Some 72 ships have so far brought government cargo via Gwadar Port, which has so far not witnessed the arrival of any commercial vessel.
  
  There are [also] the unsettled issues between the Pakistani government and Port of Singapore Authority (PSA), the concessionaire and operator of the port. The government and the PSA are in default of commitments. PSA has invested nothing during the first three years. Pakistan could not hand over 2,281 acres of land on lease for the development of a free zone for the port-related facilities at East Bay of Gwadar. Also, the port's connectivity with main roads and rail links is still required. And Gwadar Port is being built in the insurgency-hit province of Balochistan where the law and order situation has worsened over the past five years.”

• Expert 2: South Asia policy advisor to U.S. presidential candidates in 2004 and 2008

  Weak infrastructure and security
  
  

  “I think Gwadar could be transformative for Pakistan in many ways. Yes, there is pressure to finish the infrastructure in Pakistan, but if you can’t get the basic security right then you can lay out all the investment incentives you want but you won’t be able to attract other investors. It’s interesting because the Pakistanis have been trying to get the U.S. to invest. I think the U.S. reaction depends on the direction the port goes. There are some that say if this makes Pakistan a wealthier, more stable country, with greater regional integration, then that is great. Of course there are the hawks who fear this whole “string of pearls” theory, the expansion of China throughout the region, etc. So some people see this initiative as very transformative, others see it as a weak economic endeavor that won’t go anywhere. I think the whole “string of pearls” theory of the Chinese threat of dominance here is overstated. There is a lot of interest in investing and creating a long-term relationship with Pakistan. I think that the potential military issue is auxiliary to the commercial aspect.”

• Expert 3: Former secretary in Indian government, director of security policy research center

  Nearby competitors
  
  

  “In the case of Gwadar, it is a commercial port; it can satisfy the requirements for Sichuan province in Western China as well as Afghanistan and the other Central Asian Republics. But also Pakistan wants to use it as a fallback naval base for the Pakistan navy to support the primary naval base in Karachi.
  
  [There is a] port in Chebahar [Iran] being built by India because will never be able to use the Pakistani port – their relations are very bad. They of course cannot rely on Pakistan in their attempts to develop trade with Central Asia. Chebahar I think will be successful compared to Gwadar because there is not a security problem. However it will need security and infrastructure in Afghanistan to improve before it can realize its potential.”

Looking Ahead

Despite initial enthusiasm and considerable financial backing for the Gwadar Port, the project faces a number of significant obstacles on its path to commercial viability and competitiveness. First, Gwadar will suffer from the competing geostrategic interests of China, Pakistan, and their rivals. For example, India is sponsoring port construction at Chebahar, Iran, located only 100 miles from Gwadar, because, as a longtime adversary of Pakistan’s, its access to Gwadar will be limited. Second, capacity, security, and logistics shortcomings at Gwadar – as compared to its more established counterparts in Dubai or Colombo – will likely deter many international shippers.

Such factors suggest that while the activation of the Gwadar Port may result in a moderate increase in port competition, a reduction in fees, and improved commerce in both China and Pakistan, it has yet to demonstrate enough potential value to international shippers to truly move the needle as a global transit hub.

But the real impact of Gwadar could lie beyond the coastline. If the port is successful, it could herald the opening of Central Asia to new trade routes – a key strategic goal for both China and India. Transporting cargo from Gwadar to the Central Asian interior will require major intermodal infrastructure rehabilitation – look for more highways, rail, electricity, and pipeline activity in the medium term. Then, with the benefit of proper import and export pathways and a valuable location at the nexus of future hydrocarbon transit lines, Central and South Asian economies will be poised to unlock growth in industries where they have comparative advantages, such as agriculture and minerals. And the United States will likely support this growth, as local economic development is a key element of its anti-terror efforts in the region. In short, if Gwadar can overcome its considerable obstacles, it could act as a force multiplier for growth in several related economies.

Which firms are likely to win infrastructure projects in Central Asia? Which sectors in Pakistan and Afghanistan are primed for growth with the establishment of effective transport networks? Which local entrepreneurs can best capitalize on an improved economic environment?

Ergo can answer these and other questions by leveraging our extensive network of experts and in-country teams in Afghanistan, Pakistan, China, and throughout the Indian Ocean basin. Their knowledge and access undergird our in-depth market studies on political risk and sectoral development, and our rapid due diligence on potential local business partners.