New govt rethinks Silk Road projects

ISLAMABAD: After lengthy delays, an $8.2 billion 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 the signature Chinese ‘Silk Road’ projects due to debt concerns.

The rail project linking Karachi to Peshawar is China’s biggest Belt and Road Initiative (BRI) project in Pakistan, but Islamabad has balked at the cost and financing terms.
Resistance has stiffened under the new government of Prime Minister Imran Khan, who has voiced alarm about rising debt levels and says the country must wean itself off foreign loans.

Chinese envoy says Beijing will only proceed with projects that Islamabad wants
“We are seeing how to develop a model so the government of Pakistan wouldn’t have all the risk,” Minister for Planning, Development and Reforms Khusro Bakhtyar said at a recent press briefing.
The cooling of enthusiasm for China’s investments mirrors the unease of incoming governments in Sri Lanka, Malaysia and the Maldives, where new administrations have come to power wary of Chinese deals struck by their predecessors.

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

China’s foreign ministry said, in a statement in response to questions faxed by Reuters, 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 in infrastructure funds — to focus on projects that deliver social development in line with PM Khan’s election promises.

China’s Ambassador to Pakistan Yao Jing told Reuters that Beijing was open to changes proposed by the new government and “we will definitely follow their agenda to work out a roadmap for BRI projects based on ‘mutual consultation’”.

“It constitutes a process of discussion with each other about this kind of model, about this kind of roadmap for the future,” Mr Yao said.

Beijing would only proceed with projects that Pakistan wanted, he added. “This is Pakistan’s economy, this is their society,” he said.

Islamabad’s efforts to recalibrate CPEC are made trickier by its dependence on Chinese loans to prop up its vulnerable economy.

Growing fissures in relations with Pakistan’s historic ally the United States have also weakened the country’s negotiating hand, as has a current account crisis likely to lead to a bailout by the International Monetary Fund, which may demand spending cuts.
“We have reservations, but no other country is investing in Pakistan. What can we do?” one Pakistani minister told Reuters.

Crumbling railways
The ML-1 rail line is the spine of the country’s dilapidated rail network, which has in recent years been struggling to survive as passenger numbers plunge and the vital freight business nosedives.

The Khan-led government has vowed to make the 1,872km line a priority CPEC project, saying it will help the poor travel across the country. But Islamabad is exploring funding options for CPEC projects that depart from the traditional BRI lending model — whereby host nations take on Chinese debt to finance construction of infrastructure — and has invited Saudi Arabia and other countries to invest.

One option for ML-1, according to Pakistani officials, is the build-operate-transfer (BOT) model, which would see investors or companies finance and build the project and recoup their investment from cash-flows generated mainly by the rail freight business, before returning it to Pakistan in a few decades time.

Ambassador Yao said Beijing was open to BOT and would “encourage” its companies to invest.

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 Malaysia’s new Prime Minister Mahathir Mohamad outright cancelled the Chinese-funded $20bn 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,” said the author.

Published in Dawn, October 1st, 2018