The Pokhara International Airport in Nepal inaugurated by Prime Minister Pushpa Kamal Dahal Prachanda on January 1 this year is becoming a matter of concern as the airport has since its inauguration received not even a single international flight. The country fears that the project might become another expensive venture which fails to provide returns.
A recent article by Adhiraj Regmi in Khabarhub discusses the issue.
The Pokhara International Airport project replaced the existing Pokhara Airport, which was commissioned in July 1958 to boost the country’s civil aviation sector and contribute to economic and social development, as well as tourism. While it is anticipated to handle one million passengers a year and also serves as the aerial gateway to the Himalayan and Annapurna regions in Nepal, the project could be accomplished only after China’s bank agreed to fund the construction of the Airport.
China is Nepal’s largest foreign lender and has made significant investments in the nation’s infrastructure. Nepal agreed to a $215 million loan from China’s Exim Bank in 2017 to help finance the development of the Pokhara International Airport. According to the Khabarhub article, despite the public and government authorities’ early enthusiasm, the airport’s bleak operating outlook and lack of readiness have contributed to the pessimism.
While the loan was initially welcomed by Nepal for providing it with a much-needed boost in the construction of its infrastructure, several serious questions have been raised over the loan’s conditions. Chinese loans have famously high-interest rates and based on certain estimates, the rates may even be significantly, even multiple times more than those offered by foreign lenders. This may result in long-term increases in Nepal’s interest payments, which might substantial strain on the nation’s resources.
Asian Development Bank backed out of the project
As previously noted, the new airport has been built to offer more flight options to local, national, and international travellers. It aims to promote tourism in the Pokhara region, one of Nepal’s most well-known tourist attractions. Initially, the Asian Development Bank was willing to fund the project after JICA performed a feasibility analysis and suggested it be built in phases.
Further, because of the many detours and conflicts of interest involved, the previous administration planned to build the massive project all at once. ADB then abandoned the project as a result of the government’s approach.
One claim concerns the position and functioning of Barshaman Pun, a former Minister of Energy, Water Resources, and Irrigation in the Nepalese government. Pun and the Export-Import Bank of China (EXIM) signed a memorandum of understanding (MOU) to offer a $215 million financing for the Pokhara International Airport project. Several opponents stated that because the MOU was struck during Pun’s tour to China, the loan was given without going through a formal procedure of competitive bidding.
The controversy revolving around the Chinese loan
China has been making significant investments in Nepal’s infrastructure, and as a result, Nepal now seems to be more dependent on Chinese funding for its development initiatives. China is Nepal’s biggest foreign financier, and Nepal has launched further infrastructure projects with Chinese support in addition to the Pokhara International Airport project.
Chinese loans are blamed for having interest rates that are considerably higher than those of other international investors. The interest rate charged by the Chinese government is over 300% more than what the western countries charge. Moreover, loans from China have payback terms that are about 15-20 years shorter. The cost of borrowing on the loan is much greater than the rates on loans offered by other international financial organizations, such as the World Bank and the Asian Development Bank.
The World Bank and ADB would lend money to Nepal at an interest rate of 0.25 to 0.75%. Also, the Japanese financing for the Nagdhunga-Thankot project carries a low-interest rate of 0.01% and a 40-year payback schedule with a 10-year grace period. The Chinese financing for the Pokhara airport project, however, has a higher interest rate of 2% and a 25-year payback period.
The Communist regime in China has been infamous for pushing developing nations into its vicious debt trap by lending out money for investment projects and later using it to ensnare the sovereignty and strategic assets of the nation. As of 2021, the country had lent out $1.5 trillion to 150 countries, far more than that of the World Bank and International Monetary Fund (IMF).
Reportedly, if Nepal had looked into alternative financing possibilities, it could have been able to acquire a loan at a cheaper interest rate. The high-interest rates are a major worry for Nepal since they might eventually result in a heavy debt load.
A sizeable sum of foreign cash would be needed for loan repayment, which Nepal might not be able to produce. Further, Nepal may potentially need to raise taxes or reduce public expenditure to repay the debt, which might hurt the country’s economy. According to research, 42 of the 165 nations (since 2000) have obtained financing from China equivalent to or higher than 10% of their GDP.
The Uganda airport incident
Due to the Ugandan government’s failure to repay a debt, Chinese lenders, the Export-Import Bank of China, have taken control of the country’s assets, including the Entebbe International Airport in Uganda.
The financing conditions and repayment schedule were identical to those for the Pokhara International Airport. Uganda attempted to renegotiate the agreement, but the Chinese government rejected its most recent trips and requests to change the initial provisions. As a result, Uganda is forced to give up control of its sole international airport.
One of the clauses that Uganda attempted to amend was the need for the Uganda Civil Aviation Authority to seek approval from the Chinese lender for its budget and strategic plans. The agreement gave Exim Bank the sole authority to approve withdraws of funds from the UCAA accounts. Another problematic clause was that any dispute between the parties would be resolved by the China International Economic and Trade Arbitration Commission.
As many as 13 such clauses were deemed unfriendly to Uganda by people with knowledge about the matter. Apart from having the power to approve annual and monthly operating budgets, which it could reject, the Exim Bank of China also had attained the right to inspect the government and UCCA books of accounts.
The railway project in Kenya
A similar instance is said to have happened in Kenya where China funded the building of a railroad line between Nairobi and Mombasa. There are worries about increased costs because the project’s financing was granted without going through a competitive bidding procedure.
Also, the Kenyan government later released three unforeseen contracts using which, a railway, a passenger and a freight service were funded, designed and built by China. The Standard Gauge Railway, a USD 4.7 billion rail project that originates in Kenya’s coastal area and was started six years ago, has been the subject of several criminal investigations, crippling the nation’s economy with debt.
Specialists on China and Africa claimed that given the secrecy surrounding Chinese loan arrangements, the findings released by Kenya in the contract were exceptional. Kenya also owes China an inordinate amount of bilateral debt since China is its main commercial partner.
Chinese loans are criticized for being frequently granted without transparency or accountability, which some claim can result in corruption and inefficiency. There are worries that the projects may not have the anticipated economic advantages and that the loans may not be utilized efficiently.
Hambantota Port Capture
Sri Lanka struggled to repay the $1.1 billion loan it received from China for the development of the Hambantota port. In order to fulfil its financial commitments, Sri Lanka ultimately had to turn over the administration of the port to China on a 99-year lease.
The Hambantota port, with its strategic location near busy Indian Ocean shipping routes, was touted as good for Sri Lankan commerce. But it wasn’t profitable, and the government is said to have defaulted on those Chinese loans. Considering that the Hambantota port has come to represent China’s debt-trap diplomacy, many nations are hesitant to accept Chinese financing for their development initiatives.
Inadequate revenue streams to pay off the loans
The inadequacy of the revenue sources available to repay Chinese loans is one of the primary issues. At Pokhara International Airport, the primary source of revenue is landing fees and passenger charges. This income, however, probably won’t be enough to pay the loan’s debt servicing expenses.
Concerns have also been raised over the airport’s capability to accommodate up to 1.5 million passengers annually. Given the current status of Nepal’s tourist sector, several experts have argued that this projection may be too optimistic and problematic.
The possible effect of these loans on Nepal’s capacity to sustain its debt is another issue. The World Bank estimates that Nepal’s public debt was 34.4% of GDP in 2019, which is low when compared to other developing nations.
However, Nepal’s growing reliance on Chinese financing for infrastructure development might result in a sharp rise in its debt load, which could have detrimental effects on its macroeconomic stability. Even if this is still within reasonable limits, adding more debt with a high-interest rate might pressure the economy.
This may lead to less money being spent on social welfare programs and more money being raised through taxes and loan repayment costs. Moreover, Chinese finances often come with conditions such as the use of Chinese contractors and equipment. This might result in project inefficiencies and expense overruns, which would produce inferior results.
Similar problems have plagued Chinese-funded projects in Pakistan, Sri Lanka, and other nations, with delays and cost overruns resulting in poor returns on investment. In the current case also, China CAMC Engineering secured an engineering, procurement and construction contract from the Civil Aviation Authority of Nepal (CAAN) in 2014, two years before the Chinese bank executed the loan to the country.
Chinese loans come with a lack of transparency
It has been observed that China finances development projects for various nations but offers no transparency. It withholds the conditions of its loans, which increases the challenges of the recipient nations to evaluate the risks involved in taking on the debt.
International financial institutions have also criticized the absence of transparency in Chinese finances, claiming that it makes it more difficult for them to aid nations that are having trouble repaying their debts. There also have been reports of corruption and lack of transparency in the procurement process of these projects, which might drive up their costs and diminish their efficacy.
The Pokhara International Airport’s location is situated near Chhinne Danda in the western Nepali city of Pokhara’s Kaski District, 800 meters above sea level. The property is conveniently located along the Prithvi Highway and approximately three kilometres east of Pokhara’s current domestic airport (Kathmandu-Pokhara). It aims at boosting the country’s civil aviation sector and contributing to economic and social development, as well as tourism. However, the country needs to be careful to make sure it does not fall into the debt trap of other nations that have had difficulty repaying Chinese loans for infrastructure projects.
