BRI enters the tenth year

Looking at the future of the Chinese infrastructure initiative for Asia and Nepal

On 25 June 2021, China inaugurated a 435km section of the Lhasa-Nyingchi Electrified High-speed Rail. The ‘bullet train’ will have a top speed of 160 km/h and bring Chengdu closer to the Nepal border when completed in 2025. Photo: Xinhuanet

Nearly a decade since China adopted the Belt and Road Initiative (BRI) and five years after Nepal signed it, the connectivity project is trying to rebrand itself.

The $1 trillion program focused on trade, development and connectivity is financed largely by Chinese banks and SOEs.

The Green Finance and Development Center of Fudan University says a total of $755 billion has been spent on BRI projects of which more than 65% has gone into energy and transportation.

In 2013, President Xi envisioned the BRI as an aspirational world of peaceful connectivity and friendship — one that is free from conflict. Yet, over the years, its success has also drawn widespread criticism questioning its sustainability.

Chinese infrastructure projects in BRI include energy, transportation and real estate require construction inputs — like steel, cement and glass that remain oversupplied in China.

For example, the utilisation capacity of the total production of steel and oil refining in China had gone down by 10% from 80 to 70% between 2008 to 2015, signaling bad loans for the banks due to overproduction and negative effects on its overall economy.

BRI projects allowed the Chinese government to take steps to ensure that the vast majority of the construction inputs will be sourced from China to offset its industrial overproduction. This allows a large volume of trade to be in China’s favour while creating a huge trade imbalance between China and recipient countries.

In 2021, China’s trade surplus with BRI countries had reached $199.2 billion. For some countries like Italy which saw a rise of exports by 63% in 2021, others like Nepal had a trade deficit of Rs232.9 billion, when total exports was only Rs1 billion.

One thing has remained clear: while Chinese exports will continue to grow until the BRI projects are completed, countries at the receiving end must bet on export competitive projects that can reduce the trade deficit and ensure sustainability.

Secondly, the Chinese consider themselves ‘builders’ rather than ‘financers’ projecting their capacity to build projects under the BRI. It is no surprise that China dominates international project contracting. By 2018, 75 of the world’s top 250 international contracting firms were Chinese.

Most BRI projects have been funded by large state-owned banks of China and implemented by Chinese international contractors and SOEs, at times they have been subject to reproach due to poor labour relations including a lack of awareness of local rules and regulations, and especially on the hiring of Chinese labourers in large numbers instead of locals.

Maria Carrai, Professor of China Studies at NYU Shanghai argues in favour of  local adaptive governance because the success of BRI projects relies on effective communication of its social responsibilities to recipient countries with their local governments and making sure that working with the contractors or SOEs can enhance good governance.

The Addis - Djibouti SGR railway operation and maintenance were awarded to construction contractors with no actual railway operation experience resulting in a lack of adequate technical capabilities to complete the project.

Yet, the major challenge is still that Chinese BRI projects are heavily invested in countries that have historically demonstrated poor and weak governance, lack of transparency and are vulnerable to political shocks and instabilities.

Since the start of the BRI in 2013, more than 80% of total Chinese foreign assistance has gone to low-income countries, and for some like Angola, and Montenegro the BRI loans continue to risk having an unfavorable degree of dependency on China as its prime creditor.

Despite this, BRI in itself has gradually undergone reform over the years. From its lofty and vague ambition in early 2016 that did not indicate its focus, we now know its priority areas.

President Xi during the 2nd Belt and Road Forum in 2019 called for cleaner, greener, high-quality infrastructure projects that are “sustainable, affordable, inclusive and accessible”.

Chinese-backed projects have previously been under heavy scrutiny due to a lack of transparency and growing debt burden. A 2021 white paper on Belt and Road highlights the need for high-quality sustainable projects and the 2022 MOFCOM’s ‘Guidelines for ecological environment protection of foreign investment cooperation’ stresses the need for Chinese investments to meet international standards of environmentally sustainable projects.

In 2021 China declared to not to invest in coal-power plants and also to cut funding for loss-making projects. Regulatory scrutiny has forced Chinese contractors under BRI to significantly up their game, which means we will see it focusing on smaller and fewer projects of higher quality, particularly in areas of the green and sustainable energy sector.

It has been five years since Nepal signed the MoU but has so far seen little in terms of the impact. The BRI projects use the Engineering, Procurement, Construction and Financing (EPC-F) used in infrastructure projects and are particularly preferred in developing countries where debt markets are less mature and there may be wide variations in the availability and cost of debt financing.

The EPC contractor will be responsible to finance a large portion of the project and the government has to provide a sovereign guarantee to safeguard lenders’ interests and provide payment security guarantees on behalf of off-taker, usually government-owned entities.

This has generated controversy for the huge risk involved to the host country. The selection process tends to be restrictive to a particular country or set of manufacturers, in this case only to Chinese contractors.

For example, only a few weeks back the government of Nepal revoked the license issued to the Chinese state-owned China Gezhouba Group Corporation (CGGC) for the development of the Budi Gandaki Hydropower Project under the EPCF modality with a total cost of around $2.73 billion.

After the 2017 BRI agreement, for the first time, Nepal developed a project under the EPC financing modality of $88 million financed by China and with MoU between Nepal’s People’s Energy and China’s Chongqing Water Turbine Works Co. Ltd.

The agreement was to develop a 48.8 MW Khimti-2 hydropower project on the border of the Ramechhap and Dolakha districts in Province 3. However, the project suffered a major setback: 500 Chinese workers were prevented from coming back to Nepal due to the Covid-19 outbreak. Similarly, the EPCF model requires the contractors to be present in the project while the main construction takes place.

The high-interest rates associated with BRI loans with a relatively short payback period is another drawback for Nepal which prefers grants. Furthermore, in BRI projects there is a right to bid reserved exclusively for Chinese firms, but the Nepali side demands to be open to all.

Back then the BRI used to run projects on an ad-hoc basis but by 2022 it has undertaken various reforms to properly guide sustainable infrastructure development.

Because the BRI is enshrined into the CCP’s constitution, there is no question regarding its sustainability, but as BRI puts its focus on environmentally friendly infrastructures, countries like Nepal should prioritise projects that can yield better results and help strengthen Sino-Nepal relations.

Abiral Khatri is with the NIFRA bank and is a research scholar based previously at Erasmus University Rotterdam, IIM Bangalore and Renmin University of China. 

Raunab Singh Khatri is the co-founder of The Araniko Project and is a Yenching Scholar in Chinese studies at Peking University.