Nepal and Pakistan pulling the plug on Belt and Road plans, casts spotlight on public tender issues
Full transparency – through competing public tenders – of the adequacy, suitability and quality of the Chinese equipment being used could soon become a serious problem
When lofty aspirations meet the real world of competing sovereign interests the reality is that being a global superpower requires a delicate weaving of soft versus hard power with influence and dominance at multiple levels comprising military, political, economic and technological.
And a few recent cracks in the plans for hegemony highlight the complicated road to infrastructure based influence faced by China.
Last week, according to an SCMP report, the government of Nepal appears to have decided to abandon the US$2.5 billion deal to build the Budhigandaki Hydroelectric project dam with the Chinese state company China Gezhouba Group. The deal was scrapped by a new, incoming administration which criticised that the deal was signed without an open tender process, which was required by law.
Ironically, the agreement was originally signed a few weeks after Nepal joined China’s “Belt and Road Initiative”. Then, last week, Pakistan also decided to pull out of the US$14 billion Diamer-Bhasha dam with China because it refused accept the strict deal conditions.
The project will go on ahead, however, as Pakistan has decided to finance the project – which will generate 4,500 megawatts (MW) of hydropower – itself.
Exploring why they might have collapsed so close together will explain why Belt and Road projects will face severe financing hurdles.
The Belt and Road seems to be faltering in its conceptual financial stage.
Two major related projects have been cancelled within a week, in both cases because the terms were not considered by the recipient country to be fair and equitable. And this inevitably also raises issues about the commercial viability and financial credibility of some other projects.
As a former World Bank Group officer who has advised on the financing of infrastructure, I can highlight the underlying issues of these cancellations. They illustrate the problems that countries will encounter when dealing with the Chinese concept of infrastructure investment.
First of all, they cannot be analysed as investments in the conventional financial sense. They are not even donations or credit by the post second world war Marshall Plan or loans, grants made by the International Bank of Reconstruction and Development to war torn European countries, one of the World Bank institutions.
For massive power projects, the deals represent a sale of generation equipment as well as infrastructure construction. Developmental bankers say that while many recipient countries will do these deals without a sovereign guarantee, China, as a sovereign has realised that they cannot.
And international best practices dictate that these power plants need to be put out to public tender.
Full transparency – through competing public tenders – of the adequacy, suitability and quality of the Chinese equipment being used could soon become a serious problem.
Then, the importation of tens of thousands of Chinese workers to install Chinese equipment displaces the employment for locals, which leads to significant political fall out.
China probably insisted on a sovereign guarantee to support the Power Purchase Agreement (PPA). And Nepal probably refused given the onerous requirements and size. Unless China rethinks its developmental financing strategy, the need for a sovereign guarantee will persist as the Belt and Road expands. Demanding sovereign guarantees in a non-transparent bidding process only arouses suspicions of corruption.
Unless China decides to give away multibillion-dollar power generation systems it will begin acting like a rational financier and demand sovereign guarantees or guarantees on power off take agreements to support the loans.
Check book diplomacy and soft power lending generate their own hazards.
The Belt and Road Initiative looks good, until each country closely examines what their financial commitment to receive infrastructure.