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February 11, 2015



China’s reputation at risk

The people of Pakistan view China as their best friend. This friendship has stood the test of time and emerged stronger through many challenges. However, experience shows that bad decisions at critical moments can end up damaging even the best relationship.
China recently promised tens of billions of dollars in aid for infrastructure building. This is indeed very welcome for Pakistan, which has massive infrastructure needs. However, if this aid is implemented in the ‘business as usual’ manner, China’s reputation in Pakistan could face huge risks. A white elephant or corruption-ridden mega project will be an eyesore for decades. China must avoid this like the plague to protect its reputation as an all-weather friend of the people of Pakistan.
China needs to avoid the recent Sri Lanka sort of situation, which has affected China’s reputation in that country. The Chinese financed and constructed several mega infrastructure projects – notably motorways, a port and an airport – in recent years. They came under great public criticism for unusually high unit costs and non-transparent limited competition procurement process. Based on international comparisons, the Chinese-funded contracts in Sri Lanka cost significantly more than those funded through open international competition by the multilateral banks and the government. As Pakistan’s best friend with long-term strategic interests, China can ill afford a similar reputational risk here.
It is primarily the government of Pakistan’s responsibility to ensure that each infrastructure project proposed for Chinese financing is subject to rigorous ‘due diligence’ from the earliest selection/design stage, throughout implementation, and after completion. However, in today’s Pakistan this will not happen, given the weak institutional capacity and politicisation of decision-making. Therefore, China will have to shoulder most of this responsibility, as a friend of the people of Pakistan. There are

three broad areas on which China needs to focus to safeguard its reputation and to ensure effectiveness of its development assistance.
First, it is essential that any project that China finances has high economic priority, is fully justified on economic and technical grounds, and will contribute to Pakistan’s long-term growth. China needs to realise that rigorous institutional decision-making, especially when it comes to development projects, is virtually absent in Pakistan. Most such decisions tend to be politically-driven and guided by personal biases or whims. China must assure itself that each project is selected through a rigorous and sound process, and not because it is the pet idea of the leadership or ‘friends and family’ which may or may not be in Pakistan’s long-term interest.
China must avoid financing over-sized infrastructure and ensure that loan servicing and Operational and Maintenance (O&M) costs of such projects are affordable and will not haunt Pakistan for decades to come. Many of the ‘unneeded and uneconomic’ proposed projects (for example, the Orange Line, Rail to Muzzafarabad, etc) will be unaffordable to operate and maintain without large public subsidies, and will eventually run into disrepair and obsolescence.
China must apply to each project the same kind of rigorous technical, economic, institutional, environmental and social evaluation it does for its own development programmes or as any other donor committing huge sums of money. Perhaps China can require an independent ‘due diligence audit’ of each proposed project before it commits to financing the project.
This is especially needed for BOT projects to ensure that tariffs are not based on inflated capital costs, to avoid the nasty and protracted disputes that happened in the 1990s between Pakistan and foreign investors producing power – these disputes were a major blow to Pakistan’s reputation among foreign investors. It must also ensure that Pakistan is undertaking the necessary sector reforms that are critical to long-term sustainability of the proposed projects.
Second, China must ensure that global best practice transparency standards are followed in procurement and implementation. It should follow President Xi Jinping’s crackdown on ‘princelings’, and ‘zero tolerance policies against corrupt practices and kickbacks’ to avoid a Sri Lanka type situation.
Pakistan is ruled by ‘friends and family’ groups, and mega projects are their ‘instrument of choice’ to make big bucks. Optics and public perception will be critical for China’s reputation. As a minimum, China must insist that the ‘friends and family’ of the political leadership should not be involved in any of these projects, directly or indirectly, and that they do not get any special favours or underhand deals. Such association is not only bad for Pakistan, but will also adversely affect perception about China among the people of Pakistan.
China must not be seen as aiding and abetting the ‘friends and family’ style of governance. Rulers in Pakistan will come and go, but project decisions that are perceived to be favouring a few individuals or groups currently in power can do long-term damage to China’s reputation in this country. China must insist on the following measures to avoid corrupt practices of public institutions implementing infrastructure projects: (i) a committee – independent of the public sector implementing agencies and comprising local and foreign experts – to make all procurement decisions; and (ii) an independent project management arrangement for project oversight during implementation.
Finally given Pakistan’s fragile fiscal and foreign exchange reserve position, any responsible donor must ensure that projects financed by it do not contribute to our bankruptcy. Pakistan has been living off hand-outs for several decades, and there are no serious reform efforts to change this situation .China needs to carefully review whether Pakistan (and its public agencies) will be able to service the foreign debt – even with ‘soft’ loan terms – when all the revenues are in local currency. It must also examine the fiscal burden of the O&M costs of the projects’ it finances. Many infrastructure BOT projects in Pakistan have run into difficulties because the macro-economic and project revenue risks were underplayed, and tariffs made unaffordable as a result of inflated capital costs.
In this regard, the infrastructure programme to connect Gwadar to China’s northwest region of Xinjiang needs to be carefully evaluated in respect of its affordability – loan servicing and needed O&M costs. Some of these projects may be good strategic investments, but can Pakistan afford them at this time? China should seriously consider full grant financing for this programme, with rigorous assessment on the ability of Pakistan to finance the associated O&M costs in the future.
Pakistan has many ‘good and sound’ infrastructure projects that need to be built and which require external financing – such as longer gestation investments in hydropower. China should support these, but it must clearly stand up to all the bad ideas being peddled around. It must not provide financial cover for ill-conceived development projects and corrupt practices. Above all, China should avoid getting trapped into dancing the ‘bhangra’ with ‘princelings, friends and family’. The implications for China’s reputation in Pakistan are far too serious for this to be ignored.
The writer is a former operations adviser at the World Bank.
Email: [email protected]