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Pakistan Fears Economic Turmoil, Re-thinks ‘Silk Road’ Project With China

In 2017, Pakistan turned down Chinese funding for a $14 billion mega-dam project in the Himalayas because of cost concerns.

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A man passes through a railing while others board a train as they make their way home at the Cantonment railway station in Karachi, Pakistan. VOA

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 signature Chinese “Silk Road” projects because of debt concerns.

The rail megaproject linking the coastal metropolis of Karachi to the northwestern city of 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 populist Prime Minister Imran Khan, who has voiced alarm about rising debt levels and says the country must wean itself off foreign loans.

“We are seeing how to develop a model so the government of Pakistan wouldn’t have all the risk,” Khusro Bakhtyar, minister in Pakistan’s planning ministry, told reporters recently.

Pakistan
Visitors read instruction material about land that was reclaimed from the Indian Ocean for the Colombo Port City project, on the Galle Face sea promenade in Colombo, Sri Lanka, Jan. 2, 2018. The Port City project was initiated as part of China’s Belt and Road Initiative. VOA

Unease elsewhere

The cooling of enthusiasm for China’s investments mirrors the unease of incoming governments in Sri Lanka, Malaysia and Maldives, where new administrations have come to power wary of Chinese deals struck by their predecessors.

Pakistan’s new government had wanted to review all BRI contracts. Officials say there are concerns the deals were badly negotiated, too expensive or overly favored 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 Khan’s election platform.

Pakistan
China’s ambassador to Pakistan, Yao Jing, Islamabad. VOA

‘Mutual consultation’

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,” Yao said.

Beijing would only proceed with projects that Pakistan wanted, he added.

“This is Pakistan’s economy, this is their society,” Yao said.

IMF bailout likely

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 the United States, Pakistan’s historic ally, 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.

Pakistan
Laborers dig the ground before replacing concrete sleepers along railway tracks in Karachi, Pakistan. VOA

Crumbling railways

The ML-1 rail line is the spine of country’s dilapidated rail network, which has in recent years been edging toward collapse as passenger numbers plunge, train lines close and the vital freight business nosedives.

Khan’s government has vowed to make the 1,872 km (1,163 mile) line a priority CPEC project, saying it will help the poor travel across the vast South Asian nation.

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.

Yao, the Chinese envoy, said Beijing was open to BOT and would “encourage” its companies to invest.

Pakistan
A man waits to cross a portion of track once shared with the Karachi Circular Railway line in Karachi, Pakistan. VOA

Large rail projects, problems

Rail mega-projects under China’s 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 canceled the Chinese-funded $20 billion 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,” Small said.

Off-books debt

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 prioritized, along with power plants urgently needed to end crippling electricity shortages.

But while many other projects from that list have now been completed, the rail scheme has been stuck.

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. The difference between the two validate the investments made on the road, and give a hopeful image for the future.

Pakistani officials say they became wary of how early BRI contracts were awarded to Chinese firms, and are pushing for a public tender for ML-1.

Partly to help with price discovery, Pakistan asked the Asian Development Bank (ADB) to finance a chunk of the rail project through tendering. The ADB began discussions on a $1.5-$2 billion loan, but China insisted the project was “too strategic,” and Islamabad kicked out the ADB under pressure from Beijing in early 2017, according to Pakistani and ADB 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 familiar with the project, referring to the BOT model.

China’s foreign ministry said Beijing was engaged in “friendly consultations” with Pakistan on the rail project.

Chinese companies participated in BRI projects in an open and transparent way, “pooling benefits and sharing risks,” it said.

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In this file photo taken Oct. 10, 2015, a bus moves past by solar power and wind power farms in northwestern China’s Ningxia Hui region.

Chinese debt or no project

Analysts say Pakistan will struggle to attract non-Chinese investors into the project, 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 mega-dam project in the Himalayas because of 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.

Also Read: Creating a New Silk Road: China’s Billion Dollar Investments to Expand Its Transportation Network

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 harbor doubts closer to home, including the previous government’s 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. (VOA)

Next Story

Three Projects Help India to Stop its Share of Water to Pakistan after Pulwama

The waters of the western rivers - the Indus, Jhelum, and Chenab - averaging around 135 MAF, were allocated to Pakistan.

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Picture Courtesy:-www.economylead.com

The government has envisaged three projects to give intent to its decision to stop its share of water from three eastern rivers of the Indus system – the Beas, Ravi and Sutlej – from going to Pakistan.

The decision was affirmed by Water Resource Minister Nitin Gadkari on Thursday in the wake of Pulwama terror attack though the Union cabinet had approved implementation of one of the key projects – Shahpurkandi dam – in December last year.

The waters of the western rivers – the Indus, Jhelum, and Chenab – averaging around 135 MAF, were allocated to Pakistan except for “specified domestic, non-consumptive and agricultural use permitted to India”, according to a treaty.

India has also been given the right to generate hydroelectricity through run-of-the-river (RoR) projects on the western rivers which, subject to specific criteria for design and operation, is unrestricted.

pakistan, india, water ban
However, about 2 MAF of water annually from Ravi is reported to be still flowing unutilised to Pakistan. VOA

To utilise the waters of the Eastern rivers, India has constructed the Bhakra Dam on Satluj, Pong and Pandoh Dam on Beas and Thein (Ranjitsagar) on Ravi. These storage works, together with other works like Beas-Sutlej Link, Madhopur-Beas Link and Indira Gandhi Nahar Project have helped India utilise nearly the entire share (95 per cent) of the eastern river waters.

However, about 2 MAF of water annually from Ravi is reported to be still flowing unutilised to Pakistan. The other two projects are Ujh multipurpose project and the second Ravi Beas link below Ujh.

Here’s the reality check of the three projects:

Shahpurkandi Project: It aims to utilise the waters coming from powerhouse of Thein dam in order to irrigate 37,000 hectares of land in Jammu and Kashmir and Punjab by generating 206 MW of power.

The project was scheduled to be completed by September 2016. However, following a dispute between the two states, work was suspended in August 2014 but they reached an agreement last September and the construction work has now resumed with the Centre monitoring its progress. The central government had in December last year announced assistance of Rs 485 crore for the project and it would be completed by June 2022.

 

India, pakistan, pulwama, water ban
The decision was affirmed by Water Resource Minister Nitin Gadkari on Thursday in the wake of Pulwama terror attack. VOA

The project will create irrigation potential of 5,000 hectare in Punjab and 32,173 hectare in Jammu and Kashmir.

Officials said that some water of the Ravi is going waste through the Madhopur Headworks downstream to Pakistan and it is required in Punjab and Jammu and Kashmir.

The total balance cost of pending work in ShahpurKandi Dam project is estimated Rs 1,973.53 crore (irrigation component: Rs 564.63 crore, power component Rs1408.90 crore).

The Shahpurkandi Project was initially approved by the Planning Commission in November, 2001. Revised costs were approved, but there was delay in its execution both because of lack of funds with Punjab and inter-state issues with Jammu and Kashmir.

An agreement was finally reached between the two states under the aegis of Water Resources Ministry in September last year.

Ujh multipurpose project: Construction of the Ujh multipurpose project will create a storage of about 781 million cubic metres of water on Ujh, a tributary of Ravi, for irrigation and power generation and provide a total irrigation benefits of 31,380 hectares in Kathua, Hiranagar and Samba districts of Jammu and Kashmir.

The total estimated cost of the project is Rs 5,850 crore and the Central assistance of Rs 4,892.47 crore on works portion of irrigation component as well as the special grant is under consideration. The project is yet to be implemented and it will take about six years for completion.

Second Ravi Beas link below Ujh: The project has been planned to tap excess water flowing down to Pakistan through Ravi by constructing a barrage across it for diverting water through a tunnel link to the Beas basin.

The project is expected to utilise about 0.58 MAF of surplus waters below Ujh dam by diverting the same to the Beas basin.

 

india, pakistan, water share, pulwama
Officials said that some water of the Ravi is going waste through the Madhopur Headworks downstream to Pakistan and it is required in Punjab and Jammu and Kashmir. Wikimedia

The water distribution treaty between India and Pakistan was brokered by the World Bank in 1960 to use the water available in the Indus system of rivers originating in India.

 

ALSO READ: IOC Cancels Places for 2020 Tokyo Games from India after it Refused Visas to Pakistan

The Indus system comprises Indus, Jhelum, Chenab, Ravi, Beas and Sutlej rivers. The basin is mainly shared by India and Pakistan with a small share for China and Afghanistan.

Under the treaty signed between India and Pakistan in 1960, all the waters of the three eastern rivers, averaging around 33 million acre feet (MAF), were allocated to India for exclusive use.  (IANS)