Pak rethink on silk road project over debt trap

Pak rethink on silk road project over debt trap


News Delhi, Sep 30: After prolonged delays, an 8.2 billion dollar revamp of a colonial-era rail line snaking from the Arabian Sea to the foothills of the Hindu Kush has become a test of Pakistan’s ability to rethink signature Chinese 'Silk Road' projects due to debt concerns.

The rail mega project linking Karachi to Peshawar is China’s most ambitious Belt and Road Initiative, but Islamabad has balked at the cost and terms. Resistance has stiffened under the new government of the Prime Minister, Imran Khan, who has voiced alarm about rising debt levels.

'We are seeing how to develop a model so the government of Pakistan wouldn’t have all the risk,' Mr. Khusro Bakhtyar, the Pakistan Planning Minister, said recently. The cooling of enthusiasm to China’s investments mirrors the unease of new governments in Sri Lanka, Malaysia and Maldives, where new administrations have come to power wary of Chinese deals.

The new Pakistan government had wanted to review all BRI contracts and officials say there are concerns the deals were badly negotiated, too expensive or overly favoured China.To Islamabad’s frustration, Beijing is only willing to review projects that have not yet begun, three senior government officials have said.

The Chinese Foreign Ministry said in response to questions that both sides were committed to pressing forward with BRI projects, 'to ensure those projects that are already built operate as normal, and those which are being built proceed smoothly'.

Pakistani officials say they remain committed to Chinese investment but want to push harder on price and affordability, while re-orientating the China-Pakistan Economic Corridor (CPEC), for which Beijing has pledged about 60 billion dollars in infrastructure funds - to focus on projects that deliver social development in line with Mr. Imran Khan’s election promise.

The Chinese Ambassador to Pakistan, Mr. Yao Jing, said Beijing was open to changes proposed by the new government and 'we will definitely follow their agenda. It constitutes a process of discussion with each other about this kind of model, about this kind of road map for the future.'

Beijing would only proceed with projects Pakistan wanted, he added. 'This is Pakistan’s economy, this is their society.'Islamabad’s efforts to recalibrate CPEC are made trickier by its dependence on Chinese loans to prop up its economy.

Growing fissures in its relations with the historic ally the United States have also weakened Pakistan's negotiating hand, as has a current account crisis likely to lead to a bailout by the International Monetary Fund.'We have reservations, but no other country is investing in Pakistan. What can we do?' one Pakistani minister said.

Rail mega-projects under the BRI umbrella have run into problems elsewhere in Asia. A line linking Thailand and Laos has been beset by delays over financing, while the new Malaysian Prime Minister, Dr. Mahathir Mohamad, has outright cancelled the Chinese-funded 0 billion dollar East Coast Rail Link (ECRL).

Beijing is happy to offer loans, but reticent to invest in the Pakistan venture as such projects are seldom profitable, according to Andrew Small, author of a book on China-Pakistan relations. 'The problem is that the Chinese don’t think they can make money on this project and are not keen on BOT.'

During President Xi Jinping’s visit to Pakistan in 2015, the ML-1 line was placed among a list of 'early harvest' CPEC projects that would be prioritised, along with power plants urgently needed to end crippling shortages. But while many other projects from that list have now been completed the rail scheme has been stuck.

Pakistani officials say they became wary of how early BRI contracts were awarded to Chinese firms, and are pushing for a public tender. Partly to help with price discovery, Pakistan asked the Asian Development Bank (ADB) to finance a chunk of the rail project. The ADB began discussions on a 1.5-2 billion dollar loan, but China insisted the project was 'too strategic', and Islamabad kicked out the ADB under pressure from Beijing in early 2017, according to officials.

'If it’s such a strategic project then it should be a viable project for them to finance on very concessional terms or invest in?' said one senior Pakistani official. China’s foreign ministry said Beijing was engaged in 'friendly consultations' with Pakistan on the rail project and Chinese companies participated in BRI projects in an open and transparent way, 'pooling benefits and sharing risks', it said.

Analysts say Pakistan will struggle to attract non-Chinese investors, which may force it to choose between piling on Chinese debt or walking away from the project.In 2017, Pakistan turned down Chinese funding for a 14 billion dollar mega-dam project in the Himalayas due to cost concerns and worries Beijing could end up owning a vital national asset if Pakistan could not repay loans, as occurred with a Sri Lankan port.

Khan’s government chafes at several Chinese intercity mass transport projects in Punjab, the voter heartland of the previous government, which now need hundreds of millions of dollars in subsidies every year. They also fume about the risk of accumulating off-books sovereign debt through power contracts, where annual profits of above 20 percent, in dollar terms, were guaranteed by the previous administration.

With the ML-1 line, there are also those who harbour doubts closer to home, including the previous Finance Minister, Miftah Ismail, who said his ministry had always had concerns about its viability. 'When people say it’s a project of national importance, that usually means it makes no sense financially,' he said.