Nepal and the BRI conundrum
Whether the political parties in Nepal take any action or not or even if they end up doing nothing at all, by now it has become established that the Belt and Road Initiative (BRI) in Nepal cannot escape the web of domestic and international politics. It has been 7 years and so far Nepal is yet to execute a single BRI project. Why the BRI could not take off in Nepal? Numerous articles in recent weeks have highlighted the development of BRI from its geo-political implications to identifying new areas for cooperation in regards to PM Oli’s visit to China. But in another sense, Nepal also missed opportunities to catch up to global developments of BRI, particularly during the first phase of BRI. Here I will highlight how we failed to catch up to China’s development of BRI post 2017.
First, the BRI presented an opportunity for a lot of Chinese firms to explore opportunities abroad. A lot of scholars dubbed it “Going Out 2.0”. Chinese investment financed large infrastructure projects with its State-Owned Companies (SOEs) bearing the lion’s share of available Silk Road Investments. For a lot of enterprises, the BRI became their first experience venturing outside of their country. It means that most of these SOEs are reliant heavily on the governments of both China and the host country to operate due to a lack of familiarity, and in heavily corrupt countries such SOEs are prone to various risks. To add further, securing BRI projects, in initial times, required lower contracting costs, and a possible first-mover advantage meant that Chinese enterprises that were politically connected “went out”. Thus, the success or failure of the project at most determined by the host country’s regulations and policies and its way of engagement with China.
Second, globally China’s response to BRI was changing. The BRI investment peaked in 2016 – 2018. For countries that ran the projects with clear local rules and regulations, it became the game changer. However, global events like President Trump’s election victory in the US in 2016 and the escalating US-China trade war in 2017, introduced significant uncertainty. Increasing criticism of BRI projects began to emerge. Countries like Sri Lanka and Malaysia face heightened risks, and the enthusiasm that had characterized the 2017 BRI forum waned. For the Chinese, it became a point to learn their lesson. Large SOEs and policy banks started to reconsider how they view risks abroad. President Xi Jinping during a BRI symposium in 2018 “ordered authorities to pay high attention to forestalling risk overseas” calling for “progress on projects that deliver real benefits to local people.”
Now, let’s put these two reasons into the context of Nepal’s participation in BRI. We signed the BRI framework in 2017 with the proposed 35 projects. Lack of oversight, and our sluggish negotiations took us 2 years to go from 35 to finalize 9 proposed projects. This meant that by the time Nepal was “even ready” to expedite these 9 projects, China had already shifted its focus to more sustainable and environmentally focused projects. Before 2019, Chinese financial institutions only required adherence to national environmental regulations and licenses which allowed companies to easily bypass environmental guidelines without any due diligence. After 2019, the Ministry of Ecology and Environment of PRC released the “Green Development Guidance for BRI Projects” in 2020, which was the first major report to encourage “best practices” from all around the world to address various risks and develop a framework to make BRI projects feasible and sustainable. By 2023, in the Third Belt and Road Forum, President Xi made it clear that the focus of BRI, moving forward, will be more on yuan-denominated and “small yet beautiful” projects as opposed to just large-scale monolithic projects of the past. This meant that the BRI funds were slowing down from 2018 as a reaction to its international criticism, but also it geared the Chinese policymakers to focus on smaller sustainable, and meaningful projects.
Simultaneously, the area of China’s international engagement diversified. From hard infrastructure under BRI, the trend slowly and gradually shifted towards digital and health connectivity, especially during the COVID-19 pandemic. Some Chinese SOEs I have talked to in Beijing are more focused now on the health sector and are keen on establishing health infrastructure overseas as part of the Health Silk Road. Apart from BRI, now there are also “Global Initiatives” like the Global Development Initiative (GDI) which has been active in Nepal's major projects focused on rural development and poverty alleviation. One point to remember is that, unlike BRI which was hyped with much fanfare, GDI was relatively quiet and the hope in Beijing is that these small projects to make a positive impact on rural development. GDI involves direct oversight of the central government i.e. through the China International Development Cooperation Agency (CIDCA) and the projects are implemented in coordination with Chinese enterprises or other Chinese governmental organizations in the host country to monitor the flow of funds and activities. Implementation of GDI, GCI, GSI was the result of a lesson from BRI where private loans by banks resulted in unsustainable debt.
Before the 2nd BRI forum in 2019, we saw Chinese influence at the state-to-state level and elite party politics only. Now, post-pandemic later, private Chinese enterprises are also a big player. Whether it is a Muslim Chinese couple from Gansu province who runs a chuar 串儿 in Thamel, Chinese entrepreneurs from Henan who want to create jobs in Nepal and live their entrepreneurial dream, or large companies like BYD, Zeeker, or Xpeng who’s presence in Nepal’s automobile consumers have been so swift that it was impossible to imagine a few years ago. When I came to Nepal briefly in July 2024, I see all of these changes and I wondered, why BRI didn’t work when other areas of cooperation seemed to work.
It’s easier to state the BRI in Nepal became a victim of political dilly-dallying. Most of the talks I went to about BRI and Nepal in China repeatedly stated that BRI would provide positive development. However, only repeated optimism without being able to make significant progress in the last 7 years has been a disappointing trend. For Chinese companies, a lack of awareness about local host socio-political and economic factors meant that they had to rely mostly on government and political actors. Furthermore, during the initial BRI years, there was a lack of clear information on selecting Chinese companies and the limited participation of foreign counterparts underpinned the likelihood that companies selected for BRI projects are best fit to implement them amidst all concerns. Then given how tumultuous Nepal’s political scenario has been, it was not difficult to factor that the initiative couldn’t succeed in Nepal. If we look at the development of the projects, we can observe just how time-consuming procedures are for each project.[1] Policy inconsistency and the politics surrounding it became principal contributors that Nepali leaders now want the Chinese to forgive the loans for the problem they started.
Will the BRI projects even take off in Nepal? The consensus among Nepali politicians is that Nepal can only accept grants and not loans – but the dilemma is that BRI is, by large, a commercial project that is backed by “The Big Four”[2] Chinese policy banks, Silk Road Fund, EXIM Bank, CDB, etc. The focus on “smaller but beautiful” projects is clear: they can be implemented faster and contain lower risk. I think Nepal should focus on developing such projects. If BRI projects are to be based on the current framework, then it will probably take decades for projects to even materialize. From the Chinese perspective, they’re aware that if they continue to promote the BRI from the 2016 – 2017 era, it will face harsh criticism and thus they’re trying to modify the model to address larger geo-political, economic, and societal challenges. As a Chinese official of the National Development and Reform Commission (NDRC) once said about BRI loans “These days we need viable projects and a good return. We don’t want to back losers.” Today, the BRI participating enterprises face major constraints: cultural constraints i.e. unfamiliarity of the local culture, norms, social capital, institutional constraints on the unfamiliarity of local laws and regulations, procurement issues, and reliance mostly on government and political actors. For Nepal, the challenge is to not only prioritize sustainable and green development projects but also develop a strong commitment to implement it. Both of these challenges have to be addressed to not just ensure smooth implementation of the initiative, but also its sustainability.
Raunab Singh Khatri is the co-founder of The Araniko Project and PhD student in Enterprise Management at Peking University.
[1] Refer to https://www.orfonline.org/research/bri-in-nepal-an-appraisal#_edn34 and https://cesifnepal.org/uploads/attachment/bf09c40a15fe241dd783e0d110e8746f.pdf
[2] The Big Four here refers to: the Agriculture Bank of China, Bank of China, China Construction Bank, Industrial and Commercial Bank of China (ICBC)
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