Belt and Road Initiative Costs and Consequences
A telling commentary on CPEC and BRI, China’s initiative to boost trade and infrastructure in Asia, Europe and Africa linking the continents. However a number of issues have surfaced, even before the initiative takes off. In terms of deficits, concerns have been raised about owing unmanageable debts to China in Sri Lanka, the Maldives and Laos, along with Pakistan. Beijing's massive economic project is also plagued with sovereignty concerns. Ajay has carried out a detailed analysis with particular reference to India.
Belt and Road
When Premier Xi Jinping launched China’s ambitious ‘One-Belt-One-Road” Initiative in 2013, he began by quoting Confucius, ‘He who wants to succeed, must enable others to succeed.’ That seemed to be the slated objective of the $ 3 Trillion project which planned on creating a series of infrastructure projects, to connect more than 60 countries across Asia, Africa and Europe, boost trade by around 12% and link their economies irrevocably to China.
Five years later, the venture has taken on a new name -The Belt and Road Initiative - and has a slew of completed projects across the region. Chinese companies have created roads, railway lines, ports, dams, electrical substations and communication projects in record time which will provide an infrastructure boost to the nations that house them. It seems to be win-win all the way, right?
It has actually not been that way. Although the infrastructure has been developed, the host nations are realizing that they come with huge hidden costs. The benefits of creating the projects have all gone to Chinese companies with little involvement of local industry. Often, the revenues earned by the newly created infrastructure does not justify the huge costs. And as the time comes to pay back the amounts so generously loaned by China, nations such as Pakistan, Sri Lanka, Maldives, Nepal and African countries are finding themselves in an increasing spiral of debt that threatens to submerge not only their economies, but their very sovereignty.
CPEC – The Centerpiece of BRI
Imran Khan, in one of his pre-election planks had charged his predecessor, Nawaz Sharif, with selling off the nation’s interests in the CPEC projects. One of his first actions in power was to review the CPEC projects which he claimed the nation could ill-afford. Yet, just a few months into power, he is now singing paens of CPEC calling it “a blessing for Pakistan.” It is an abrupt turnaround, which reveals how tightly China has Pakistan in its grip.
When CPEC was launched in 2015, it envisaged a series of projects ranging from the development of Gwadar port, the North- South highway leading from Gwadar up to the Chinese province of Xinjiang, Special Economic Zones, road and rail projects, OFC cables, electric stations and hydroelectric dams. These projects were to be developed by China at a cost of $46 Billion and have now climbed to $62 Billion and rising.
A cash-strapped Pakistan, which needs $13 Billion just to service its national debt, was hit hard when the USA cut funding due to its links with terror organizations. Its traditional savior, the IMF, refused the $11 Billion bail-out on the grounds, that most of the money would be used to pay off Chinese companies and in effect go directly to China. They also demanded details of CPEC projects, including scope, repayment terms, future plans and envisaged projects, which both China and Pakistan were reluctant to share. A grant of $7.6 Billion from China (plus an additional $6 Billion from Saudi) has helped Pakistan in the immediate term, but has only increased its dependency on China and deepened its debt burden.
Pakistan now owes $23 Billion to China which will rise to $90 Billion by 2020. One of the reasons for the huge escalation in costs is that China provides services, materiel and expertise of Chinese companies to develop the project – in effect utilizing its surplus capacity – but asks for repayment in dollar terms. And each default on repayment leads to taking more loans and giving in to additional conditions.
One of the conditions of the latest Chinese aid was an increase in the scope of CPEC projects (rather than a reduction which Pakistan initially hoped for.) The CPEC is proposed to be extended to Afghanistan. With the Taliban likely to come into power there, Chinese and Pakistani engagement there will be welcomed. Saudi Arabia too has been approached to invest in CPEC projects which will link another nation to it. These would have dangerous implications for India.
Even more dangerous is the military turn that the CPEC projects are taking. A SEZ is being created in Pakistan to jointly create a new generation of fighter aircraft (in addition to the JF-17 being made in Kamra.) For the first time, navigational equipment, radars, on-board systems, weapons and avionics will be made in Pakistan, along with the basic airframe. This will built up their defense capabilities and also enable them to act as a conduit to export Chinese equipment to the rest of the world.
China has also incorporated the BeiDou satellite navigational system in CPEC. Pakistan has received the military version which can provide pinpoint accuracy to its missiles, aircraft and ships. China seems to be testing the ground here which will enable it to expand the applications of BeiDou to other BRI nations enabling them to circumvent the US Global Positioning System.
This expansion of CPEC, will provide infrastructure and materiel that can be used by both Pakistan and China against India. The more Pakistan sinks in its debt trap, the more it is dependent on China, and the more dangerous would be the situation for India. Prompted by Pakistan, China may be tempted to add depth to its massive investments in Pakistan and POK, by raising the ante on Kashmir. Heavily in debt to China, and isolated from most of the world, Pakistan is now tied firmly to China, not as a partner, but as a pliant accomplice. This may be dangerous to us and the world community.
Islands in the Sun
Two islands occupying vital strategic spaces in the Indian Ocean, are also finding out that Chinese investments come at a price. Sri Lanka had joined BRI with great enthusiasm and under the former Rajapaksa government had willingly absorbed Chinese investments. China pumped in funds to develop ports and airfields, thermo-electric plants, highways and roads. By 2016 Sri Lanka owed China $ 6 Billion, a figure which has now climbed to $13 Billion. A whopping 77% of its debt is held by China and its debt servicing alone will rise to around $17 Billion over five years. Paying it off will be a tall order.
As always, the development of these projects were done entirely by Chinese companies, using Chinese manpower and materiel. Barring cement and gravel, everything else came from China. Few local jobs were created and barring a few ancillary contracts, the fruits of the development all went to China.
China had spent millions to ensure that a pliable Rajapaksa would be in power, as part of their strategy to ensure that ‘friendly’ governments are in place. Though the new Prime Minister – Wickremesingha - was elected largely on the plank that he would reduce dependence on China, there was little he could do to extricate his nation from the debt-trap they had already fallen into. Sri Lanka had accepted investments they could ill-afford and racked up debts they were in no position to repay. In desperation, Humbantota port was handed over to Chinese companies on a 99 year lease – along with 15,000 acres of prime land where China proposes to establish a SEZ- and in return $1.6 billion of repayment costs were waived off. China gained control of a strategic port just 100 kilometers from India’s shores, with little cost and effort. .
The port itself is a case in point. The project was cleared in spite of objections from locals and environmentalists (in part because it lay in Rajapaksa’s constituency.) The port was meant to draw maritime traffic heading towards the Far East and in anticipation of the boom that would follow, an airport was also constructed 30 kilometers away. Yet, the port drew less than a hundred ships last year and even the lavish airport operates just five flights a week. In other words, the promised revenues are nowhere in the offing. Without revenues to justify the huge costs incurred, Sri Lanka had little choice but to give in to Chinese demands for the port.
A similar strategy has been followed in Maldives. The tiny, strategically located nation rushed to sign investment deals ranging from the 1.4 kilometer long Friendship Bridge connecting Male with its international airport at Hulhule, ports, roads and plants. Aided by the willing compliance of former President Mohammed Nasheed, Maldives racked up a $3.2 Billion debt. China now holds 80% of the country’s sovereign debt amounting to a quarter of its GDP. In simpler terms it implies that each Maldivian owes $8000 to China.
As in Sri Lanka, China supported a willing President, Mohammed Nasheed and courted him throughout his tenure, funding his lavish lifestyle, providing perks, and even supporting him when he declared an unconstitutional Emergency. The new President Mohammed Solih took over a nation with empty coffers and with a debt that was unsustainable.
Solih has tried to wean away from Chinese influence. In his first act he cancelled the skewed Free Trade Agreement which would have flooded his country with Chinese products and made it a conduit for their export. A $1.4 billion grant that he received from India will see it for a while. But the pressure of the accumulated debt is steadily increasing and already the Chinese are pressing for long term leases on its islands in return of debt. It is a vicious debt-trap strategy which will enable China to gain control of strategic pieces of turf in the neighborhood.
Bangladesh and Nepal too have been wooed with a slew of projects. Bangladesh formally joined BRI in 2016 and since then China has invested $9.5 Billion in projects ranging from the up-gradation of Chittagong port, the Padma Rail Bridge, power plants, digital connectivity and grid networks. Though it has welcomed the investments, Bangladesh has been cautious. It recently turned away a Chinese proposal to develop Sonadia Islands as a deep water sea port – one which would have given the Chinese another vital port in addition to Gwadar and Humbantota. The Shiekh Hasina government has kept India’s strategic interests in mind, but in most cases the lure of China’s cheque book diplomacy has proved irresistible.
Nepal, after its spat with India, has welcomed Chinese plans to develop connectivity towards China. The new Prime Minister K P Sharma Oli recently signed a $ 2.4 Billion project to develop a 72 kilometer long railway line from the Tibetan border to Kathmandu, a project funded by Chinese ‘soft loans’. The project may go the Humbantota way, with little revenues to justify its huge costs. Nepal’s increased tilt to China makes it susceptible to its debt-trap strategy and it is up to India to provide suitable alternatives that will help balance the tilt.
Other nations too are realizing the costs. Malaysia’s new Prime Minister scrapped three BRI projects calling them ‘unsustainable’ and ‘a new version of colonialism.’ Laos too is feeling the consequences of signing up for a $ 6.7 Billion railway project which cost almost 40% of the nation’s GDP. The much touted Djibouti port has escalated the nation’s public debt to 85% of its GDP in just two years. Other nations too are susceptible. China has loaned $125 Billion to Africa under BRI projects which threatens to bury nations like Senegal, Rwanda and Mauritius under a massive debt. Using the clout of its accumulated debt, China is poised to gain economic dominance over the continent, and maintain a strangle hold which can last decades, if not more.
John Adams famously said, “The way to subjugate a country is either through the sword or by debt.” China has chosen the latter with telling effect. Their strategy is simple. Lure a nation with ‘soft loans’, build and operate the infrastructure, demand repayment (usually with high rates of interest), and in case of default, either give an additional loan or take possession of what they have developed.
Through this form of economic warfare, they have been able to encircle India with a series of neighbors who have little option but to follow China’s will. To counter their strategy, India will have to provide alternatives, in conjunction with other affected nations such as Japan. We will not be able to match their resources, but can use our central location to provide linkages to the nations in the vicinity. Nepal can be provided access to Indian ports by developing roads from Kathmandu to Calcutta and Vishakhapatnam. The distance will be quarter to that of Chinese ports. Developing the India- Bangladesh- Myanmar highway will enhance connectivity to Far Eastern economies. Nations are awakening to the hidden costs of BRI and may turn to slower, but safer means of investments which India can provide. But if we are to develop these alternatives, we must enhance the pace of our own infrastructural development and decision making to match that of China. Only then can we prevent the kind of strategic and economic encirclement that China is weaving around us in the neighborhood.