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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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Trains,Pakistan
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
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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.

Pakistan
. 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.

Pakistan
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)

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U.S.- Canada Show a United Front During Huawei Tech Executive’s Trial

Canada’s Foreign Ministry said Canadian officials were granted consular access Friday to one of the detainees and they are still trying to contact the second.

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Canada
Canadian Foreign Minister Chrystia Freeland takes part in a news conference at the Embassy of Canada in Washington. VOA

The United States and Canada promised a fair judicial process for a Chinese tech executive who was arrested earlier this month in Canada.

In talks at the State Department on Friday, the U.S. and Canadian foreign and defense ministers put on a united front, following a growing diplomatic dispute between the United States and China, in which Canada finds itself in the middle.

Canada’s Foreign Minister Chrystia Freeland defended her country’s detention of Huawei Chief Financial Officer Meng Wanzhou, saying it was “not a political decision,” but “a matter of following the rules.”

Secretary of State Mike Pompeo said the United States was also “respecting the rule of law each step along the way” as it seeks Meng.

Canada arrested Meng at the request of the United States, which says Huawei violated U.S. sanctions on Iran. She has been released on bail and is awaiting possible extradition to the United States.

Huawei, China, Canada
A man lights a cigarette outside a Huawei retail shop in Beijing. VOA

Disagreement with Trump

Freeland implicitly pushed back against recent comments by U.S. President Donald Trump, who has said the case could be used as part of wider trade negotiations with Beijing.

“It is also very important for Canada that extradition agreements are not to be used for political purposes,” she said. “Canada does not do it that way and I believe it is obvious that democratic countries, such as our partners in the United States, do the same.”

Freeland also said she was extremely concerned about the fate of two Canadians — businessman Michael Spavor and former diplomat Michael Kovrig — who were detained in China this week, in what is widely seen as a case of retaliation against Canada’s detention of Meng.

Huawei, China, Trump, Canada
Meng Wanzhou, Huawei Technologies Co. Ltd.’s chief financial officer, is seen in this undated handout photo obtained by Reuters. VOA

“For me and the prime minister, there are no issues that touch us more personally and immediately than the detention of Canadians outside our country,” Freeland said, adding, “This is a huge priority for our government.”

Canadians ‘ought to be returned’

Secretary of State Pompeo called China’s detention of the Canadian citizens “unacceptable” and said that they “ought to be returned.”

China’s foreign ministry says the Canadian citizens are each being investigated on suspicion of violating China’s national security laws. Analysts and rights groups have called those laws powerful and vague.

In a statement Saturday, the International Crisis Group called for the immediate release of Kovrig, who is their senior expert for North East Asia, based in Hong Kong. The group said Kovrig had always worked transparently and constructively with Chinese authorities.

Mike Pompeo, USA, Canada
U.S. Secretary of State Mike Pompeo speaks to reporters, Dec. 12, 2018, at United Nations headquarters. VOA

“The real danger to China comes from Michael’s arbitrary arrest and detention, for these will have a chilling effect on people wanting to visit and engage with the country,” said Crisis Group president and CEO Robert Malley.

The statement also noted that since Kovrig had been a Canadian diplomat in China between 2014 and 2016, “diplomatic missions around the globe should be concerned by the suggestion that normal diplomatic work could be grounds for future detention.

Also Read: As Huawei CFO Gets Released On a Bail, Trump Suggests a Trade Deal With China

Canada’s Foreign Ministry said Canadian officials were granted consular access Friday to one of the detainees and they are still trying to contact the second. The Crisis Group confirmed that the Canadian ambassador in Beijing has been able to visit Kovrig. (VOA)