Fearing a debt trap, Pakistan rethinks China's plans for the "Silk Road"

ISLAMABAD (Reuters) – After long delays, the modernization of an Arabian-Arab railway line at the foot of the Hindu Kush, at a cost of $ 8.2 billion, proves Pakistan's capacity to rethink projects debt problems.

The railway megaproject linking the Karachi coastal metropolis to the northwestern city of Peshawar is Pakistan's largest belt and road initiative project, but Islamabad has hesitated over cost and funding.

The resistance has hardened under the new government of poplar Prime Minister Imran Khan, who has expressed concern over the rising level of debt and said the country should withdraw from foreign loans.

"We are seeing how to develop a model so that the Pakistani government does not have all the risk," Pakistani Planning Minister Khusro Bakhtyar said recently.

The cooling of enthusiasm for Chinese investment reflects the uneasiness of incoming governments in Sri Lanka, Malaysia and the Maldives, where new administrations have come to power, suspicious of the Chinese agreements concluded by their predecessors.

The new Pakistani government wanted to review all the BIS contracts. Officials say the deals have been badly negotiated, overpriced or over-favored.

But much to Islamabad's frustration, Beijing is only willing to consider projects that have not yet started, three senior government officials told Reuters.

The Chinese Foreign Ministry said in a statement in response to questions sent by Reuters that the two sides pledged to move BRI projects forward "so that the projects already built are functioning normally and the projects in progress are unfolding. normally" .

Pakistani officials say they are still committed to Chinese investment, but want to redouble their efforts on price and accessibility, while reorienting the Sino-Pakistani economic corridor (for which Beijing has invested about $ 60 billion). to ensure social development in accordance with Khan's electoral program.

China's ambassador to Pakistan, Yao Jing, told Reuters that Beijing is open to the changes proposed by the new government and "we will certainly follow their agenda" to develop a roadmap for BIS projects based on mutual consultation ".

"This is a process of discussion between us on this type of model, on this type of roadmap for the future," Yao said.

Beijing would only carry out the projects desired by Pakistan, he added. "It's Pakistan's economy, it's their society," Yao said.

Islamabad's efforts to recalibrate the CPEC are made more difficult by its reliance on Chinese loans to support its vulnerable economy.

Growing fissures in relations with Pakistan's historical ally, the United States, have also weakened the country's bargaining power, as well as a current account crisis that could lead to a bailout by the International Monetary Fund, which could result in reduced expenses.

"We have reservations, but no other country is investing in Pakistan. What can we do? Said a Pakistani minister to Reuters.

RAILROADS

The ML-1 railway line is the backbone of the country's dilapidated railway network. In recent years, it is about to collapse due to the drop in the number of passengers, the closing of the train lines and the vital shortage of the freight sector.

Khan's government has committed to making the 1,782-km (1,163-mile) line a priority CPEC project, saying it will help the poor cross the large South Asian nation.

But Islamabad is exploring funding options for CPEC projects that deviate from the traditional BRI lending model – whereby host countries contract Chinese debt to finance the construction of infrastructure – and has invited the government to invest in infrastructure. Saudi Arabia and other countries to invest.

According to Pakistani officials, an option for the ML-1 is the build-operate-transfer (BOT) model, which would allow investors or companies to finance and build the project and recover their investments generated mainly by rail freight. . return it to Pakistan in a few decades.

Yao, the Chinese envoy, said Beijing was open to BOT and that she would "encourage" her companies to invest.

Railway megaprojects under the auspices of the BIS in China have encountered problems elsewhere in Asia. Funding delays were recorded in a line linking Thailand to Laos, while Malaysia's new Prime Minister, Mahathir Mohamad, has outright canceled the China-funded project for the European Coast (ECRL).

According to Andrew Small, author of a book on Sino-Pakistani relations, Beijing is happy to offer loans, but is reluctant to invest in the Pakistani company, as these projects are rarely profitable.

"The problem is that the Chinese do not think they can make money on this project and are not enthusiastic about the BOT project," Small said.

DEBT OF BOOKS

During President Xi Jinping's visit to Pakistan in 2015, Line ML-1 was placed on a list of priority CPEC projects, as well as the plants needed to end the electricity shortages.

But although many other projects on this list have been completed, the railway project is stalled.

Pakistani officials worried about awarding BIS contracts to Chinese companies and pleaded for a public tender for the ML-1.

Partly to help price discovery, Pakistan has asked the Asian Development Bank (ADB) to finance part of the railway project through tenders. The AfDB has begun discussions on a $ 1.5 to $ 2 billion loan, but China insisted the project was "too strategic", and Islamabad expelled the AfDB under pressure from Beijing. beginning of 2017, according to Pakistani officials and the AfDB.

"If it's such a strategic project, it should be a viable project for them, on very favorable terms, or to invest in very profitable projects," said a senior Pakistani official familiar with the project.

The Chinese Foreign Ministry said Beijing was engaged in "friendly consultations" with Pakistan on the railway project. Chinese companies have participated in IRB projects in an open and transparent way, "gathering benefits and sharing risks".

Analysts say Pakistan will have trouble attracting non-Chinese investors to the project, which could force it to choose between accumulating Chinese debt or moving away from the project.

In 2017, Pakistan refused China's funding of a $ 14 billion mega-dams project in the Himalayas, fearing costs and fearing that Beijing would end up owning a vital national asset if Pakistan could not repay its loans, as was the case in a Sri Lankan port.

Khan's government mocks several Chinese intercity mass transport projects in the Punjab, the former government's electoral center, which now requires hundreds of millions of dollars in subsidies each year.

They are also concerned about the risk of sovereign debt accumulation outside of the books through electricity contracts, where annual profits of more than 20%, expressed in dollars, were guaranteed by the previous administration.

With line ML-1, there are also those who have doubts closer to home, including the finance minister of the previous government, Miftah Ismail, who said his department had always been concerned about its viability.

"When people say it's a project of national importance, it usually means that it has no financial meaning," he said.