'Pakistan's aviation needs boost to capitalise on CPEC,' says Mark Goh, National University Singapore

Mark Goh is currently a Professor at the Department of Decision Sciences and Director (industry Research) with the Logistics Institute-Asia Pacific at the National University of Singapore, where his areas of interest include supply chain management and physical distribution management. His first book was called 'Growth triangle: problems and prospects in international business,' which studied international business from the lens of economic development in Singapore, Indonesia, and Malaysia.

BR Research recently caught up with Mark at the 32nd AGM of Pakistan Institute of Development Economics (PIDE), where he gave the Allama Iqbal Lecture on the 'role of productivity, quality and innovation in making CPEC work for Pakistan.' The following interview is the edited draft of his post-lecture discussion with BR Research. The topic, of course, is CPEC seen from the lens of Mark's area of expertise.

<B>BR Research: Let's start off from your understanding of Gwadar; its current state and potential. Compared to other large container ports in the region such as Shanghai, Singapore, Shenzhen and Dubai, how does Gwadar fare on the different metrics such as cargo handling capacity, container yard space, cargo storage capacity, and other transportation infrastructure such as air, rail, and road links?</B>

<B>Mark Goh:</B> These are very specific capital investment questions; it is difficult to compare cargo handling capacity, terminals, berths and so forth at the moment, since Gwadar is still a work in progress. For instance, if I remember correctly, the number of berths in Gwadar is in a very different order than those in Shanghai, Singapore, or Dubai, since these older ports are much bigger.

But I think Gwadar's role and potential does not lie as much as in the number of berths but in its strategic location, since it gives potential access to Central Asian states and serves as a backdoor entry to the western provinces of China. And in the case of the latter, it fits very well into China's western region development plan.

The Chinese would want to raise the overall profile and quality of life of their population, and Gwadar is an important part of their game plan. The good news for Gwadar is that it is literally starting from scratch; it therefore has the opportunity to become a state-of-the-art port.

There are four possible basic means of connectivity - the air, the port, the road, and the railways. In addition, there is the pipeline. Together, these can make Gwadar a great inter-modal transportation hub.

<B>BRR: What are the roots of this potential?</B>

<B>MG:</B> The potential is there because Gwadar is a naturally deepwater port, which means there is little need for dredging. All you have to do is to develop the hinterland, build the roads, set up the infrastructure and you are good to go. It is also important to note that Gwadar is protected from the open ocean because it is on the right side of the bay; rather than the left side of the bay, which means it is protected from strong currents while being a deepwater port at the same time.

<B>BRR: Certain quarters theorise that Chabahar is going to give competition to Gwadar. Where do you stand on that?</B>

<B>MG:</B> It depends which horse you want to favour; if you favour one horse over another, you will put your money there. As of now, it seems it is Gwadar, since it offers the shortest route, and recent developments point to the same.

There are three main considerations here: political, safety, and security. I believe Pakistan was chosen because of its unique reason and good relationship with China. And the reason why China chose Gwadar rather than the ports in Karachi is because it is easier to develop a brand new port than improve an existing port, which may already be choked.

<B>BRR: If that is indeed the case then why do you think that China did a cargo train test from east of China, via Central Asia into Tehran?</B>

<B>MG:</B> It was to make a point to the world that after so many years of talking and negotiating across several countries, China is really following through with the plan. It was also to prove that the Chinese will put their money where their mouth is. Second, as I understand, the Chinese always look out for options. Let me give you an example of how China looks at options, and that is good for modality choices.

Most of China's oil supply goes through the Straits of Malacca, which is a very busy channel. So, they have been working on three possible options for the same oil. Through the east, they have the traditional Straits of Malacca. There they have built a by-pass as well from one side of Malaysia to another, which means oil doesn't have to go through the entire Straits; it can stop half way and the rest can be transported via another transportation means across Malaysia to its eastern side where there is also a port and terminal facilities. From there, the oil is shipped off to coastal China. This helps to cut the delivery time. They have also invested in the southern part of Myanmar, from where oil will be shipped all the way to southern part of China. And then there is Gwadar to help connect with western China. In this way, China will not be dependent on oil coming from one transport route only.

<B>BRR: Do you have estimates of Gwadar's benefits to China in terms of cost and time?</B>

<B>MG:</B> As I mentioned in my presentation at PIDE, it would take about four-five days to cargo goods from Kashgar to Gwadar, which will help China reduce the time compared to transporting goods through the Straits of Malacca. Moreover, in dollar terms, every one day lost in transport can probably result in a loss of one percent of trade value.

<B>BRR: What is your assessment on Pakistan's potential to emerge as a supply chain hub, both in the context of service logistics such as warehousing, trucking, and documentation services, as well as production logistics such as contract manufacturing and assembly?</B>

<B>MG:</B> It is very hard to say at the moment considering that I don't know enough about the state of these industries in your country. But suffice to say, Pakistan needs to improve its infrastructure, ensure fixed schedule of rail, road, port, and airport services, given that businesses cannot afford to lose even a day. Pakistan also needs to improve its passenger airlines sector to maximise the opportunity for better transport connectivity; and both service and production logistics need safety and security too.

<B>BRR: Let us flip the question around. Would China be looking for service logistics in Pakistan or production logistics?</B>

<B>MG:</B> Its biggest interest is in service logistics. But production logistics may also follow suit.

<B>BRR: Given the high labour cost differential between China and Pakistan, why wouldn't China want to set up production logistics in Pakistan?</B>

<B>MG:</B> Let's look at the FTC industry - which is footwear, textile, and clothing. The FTC industry is facing high labour costs in China because a lot of workers tend to go to electronics industry because they pay better compared to FTC.

But why is China relocating this industry to Vietnam rather than Pakistan, when in fact Vietnam is not cheaper than Pakistan based on the data presented in the conference earlier, and that the FTC industry is very sensitive to labour costs? One reason is the proximity to southern China, where most of China's FTC industry is located, and the other is that the stitching skills of the Vietnamese workers are better.

The only way Pakistan can fit into the equation is when you can say, 'we not only have cheap labour but also our quality is as good as rest of the world.' This of course will have to be in addition to ensuring that infrastructure issues and power and gas shortages are resolved, which is why China is investing heavily in Pakistan's power sector. The proximity to power stations will determine the success of the special economic zones or export processing zones.

<B>BRR: How badly do you think China needs Pakistan? Should Pakistan negotiate tightly or should it let China enter first and then negotiate strongly later?</B>

<B>MG:</B> We have to look at this way - is there a downside to what China is doing right now? What is the downside if, for instance, China does not immediately employ Pakistani workers or ensure skills or technology transfer - and we are not talking about the geopolitical perspective - from a purely economic perspective?

The answer is probably none, since that Chinese FDI would help grow the Pakistani economy either way.

Another important thing to consider is whether Pakistan - its business managers, engineers, labourers, and so forth - are ready to provide the expertise that China needs. The fact of the matter is that one cannot train the workers and managers overnight; you need at least 3-4 years. Once Pakistani workers are as productive as the Chinese, then with the current lower labour costs in Pakistan there is no real incentive for the Chinese firms to bring their workers.

One of the key things to that end is to ensure that the locals are trained first. If a SEZ is close to a tribal area, then workers from the local area need to be trained first to ensure that there are no rifts caused in terms of interprovincial disputes.

<B>BRR: What factor conditions do global shipping and logistics giants such as Maersk and Cosco look for in a particular country to use it as a transit hub?</B>

<B>MG:</B> They bring their own management team, even if they have to pay higher in terms of relocation allowance. In terms of factor conditions; safety and security are the top priority for them. And safety has to be understood in the broader sense of food and water availability, hygiene, leisure, good health, schooling for their family and children, and so forth.

<B>BRR: What kind of FDI flows do you expect from China to Pakistan; do you expect market-seeking ones; efficiency-seeking resource, or strategy-seeking FDI?</B>

<B>MG:</B> Well in some cases, it will be market-seeking such as mobile phone manufacturing because Chinese companies now want to expand beyond their boundaries. But they will also be relocating their industries to Pakistan and from thereon ship to rest of the world.

The Chinese may also be interested in contract farming in Pakistan's livestock sector for milk and meat, aside from vegetables, fruits, and other crops.