Rough Road Ahead: Challenges Facing Implementation of Contracts under the BRI

From land acquisition to hiring of personnels-challenges abound to implement contracts under the Belt and Road Initiative (BRI)

[A version of this article appeared in the Kathmandu Post on February 15, 2019 entitled “Rough Road Ahead.”]

Nepal and China have shared close bilateral ties for many years, reinforced by mechanisms such as the Joint Consultation Mechanism, Nepal-China Inter-Governmental Economic and Trade Committee, Nepal-China Joint Committee on Agriculture Cooperation, and Border Law Enforcement Cooperation, among others. After the first “economic aid” ties in October 1956, China has risen to become one of the leading investors in Nepal; for the third consecutive fiscal year, in 2018, China topped the foreign direct investment ranking in Nepal, accounting for 84 percent (approximately $427 million) of the total investment. Since 2013 and as of December 2018, Nepal and China have signed contracts for investment in Nepal amounting to $3.32 billion.

While western investors have generally viewed Nepal’s political instability and its rugged terrain as challenges to infrastructure investment, Chinese investors have deemed Nepal adequate for investment “because of investment-friendly policies from government side.”

While western investors have generally viewed Nepal’s political instability and its rugged terrain as challenges to infrastructure investment, Chinese investors have deemed Nepal adequate for investment “because of investment-friendly policies from government side.” As Nepal continues to sign and expedite major projects under the Belt and Road Initiative (BRI) in the “hydropower generation, manufacturing, river training and agricultural industries,” for example, it is especially important to evaluate how infrastructure projects have fared in Nepal and what kinds of challenges they face in upholding the terms of the contract, progressing, and meeting deadlines.

Political and Geopolitical Challenges
According to Deloitte’s analysis of BRI projects and their conversations with BRI clients, political risks tops the other risks associated with the implementation of contracts for BRI projects. Deloitte suggests that this risk can be mitigated by understanding and overseeing the stability of the host country’s government through the duration of the projects. Such political instabilities are true of Nepal as well. For example, in late 2017, the $2.5 billion Budhi Gandaki hydropower project (anticipated to meet Nepal’s demand of 1,200 megawatts of the total 1,400 megawatts requirement) was scrapped by the government. The cancellation followed a change in the leading party of government from the Maoist-led government, although a lack of efficiency was named one of the reasons for the cancellation. Political interests will no doubt play a role in the future as well, as governing parties’ priorities change. It is important for the leadership to ensure that the progress of the national-interest projects continues.

Delays in the decision-making process are another major issue that threatens the productivity of infrastructural investments. As of late 2018, the Chinese government was still waiting on approval from the Department of Roads in Nepal to move forward with the second phase of the Ring Road expansion project. Delays from the Chinese side have also been an issue, as has been the case with Kulekhani-3 Hydropower Project, where one of the contractors, Jheijian Jialin, responsible for the electromechanical works of the project, has been repeatedly asked by the Nepal Electricity Authority to speed up construction and has been imposed with a fine of Rs. 80 million for the delays. The Upper Trishuli 3A Hydropower Project faced similar delays, as the lending bank, Export-Import (Exim) Bank of China, has delayed the deployment of funds to the contractor for construction.

In the same vein, Nepal’s increasingly close ties with China threaten to change the geopolitics of South Asia. After India-funded projects that failed to be completed, including road and hydropower projects, China has presented itself as a reliable partner for investment in infrastructure, including gifting a new training academy in 2018 for Nepal Armed Police Force, previously a project claimed by India. China promotes a narrative of unity in South Asia, supposedly to downplay the tensions between the two countries, and has asked India to join China in investing in infrastructural projects in Nepal. This type of proposition has hardly come from India; while China has promoted the connectivity of the China-Nepal-India economic corridor, India has generally been wary of the project.

Transparency and Fair Competition

At the European Business Summit held in the first half of the 2018, European delegation raised the issue of transparency of China-funded projects so that European companies can apply for projects and also ensure their sustainability. According to Nikkei Asian Review, 89 percent of contractors participating in Chinese-funded transportation projects are actually Chinese. In contrast, projects funded by multilateral agencies such as the World Bank and the Asian Development Bank are much more diverse, with 29, 40.8, and 30.2 percent contractors that are Chinese, local, and foreign, respectively. The reason for the popularity of Chinese contractors could be that Chinese contractors are highly competitive, and some contracts require recipients to hire only Chinese contractors. While this practice has been commonly used by Western lenders in the past, because of their inefficiency, the lack of a competitive bidding process, and pressures from international interest groups, the practice was abandoned.

Before the contract awarded to China Gezhouba Group Corporation for Budhi Gandaki hydropower project was briefly scrapped by the government in late 2017, it faced various delays to move forward in the process of construction (e.g., failing to receive an official letter from the PM’s office deciding to provide the viability gap funding). Following the delays, the government decided to mobilize domestic resources to build the infrastructure, and then, to call for international tendering to find the most competitive bidder. Ultimately, however, the $2.5 billion Budhi Gandaki hydropower project was restored in September 2018 to the China Gezhouba Group Corporation. But the details are yet to come out.

Before the contract awarded to China Gezhouba Group Corporation for Budhi Gandaki hydropower project was briefly scrapped by the government in late 2017, it faced various delays to move forward in the process of construction (e.g., failing to receive an official letter from the PM’s office deciding to provide the viability gap funding). Following the delays, the government decided to mobilize domestic resources to build the infrastructure, and then, to call for international tendering to find the most competitive bidder. Ultimately, however, the $2.5 billion Budhi Gandaki hydropower project was restored in September 2018 to the China Gezhouba Group Corporation. But the details are yet to come out.

Currently, the Budhi Gandaki Hydropower Project is only at 9.9 percent in terms of physical progress and financial progress is only 10 percent. The compensation of land acquisition to the displaced is still underway in various areas of the project, namely Arughat Bazar of Gorkha and Khahare Bazar of Dhading district. Critics quickly pointed out that the project should have undergone a competitive, international bidding process instead of simply being handed back by the Nepali government. The lack of a competitive tendering process can hurt the efficiency of the projects and the opportunities for local contractors as well as violate local tendering laws. Many things depend on the goodwill of the host government.

Patrick M. Norton, an independent arbitrator based in New York City, argues that there are two basic sets of contracts (performance agreements to construct infrastructure and underlying financial agreements) that BRI infrastructure projects will require. Various parties, including investors, contractors, local governments, and operational parties, will without doubt become involved in the projects during and much after the construction as well. To resolve contractual disputes arising from such joint ventures, Norton suggests a government-to-government mediation process, judicial resolutions (for, e.g., cases involving local laws in the areas of tax and real estate disputes), and arbitration (which will require a venue and an institution for administering the process).

Contractual Disputes
Patrick M. Norton, an independent arbitrator based in New York City, argues that there are two basic sets of contracts (performance agreements to construct infrastructure and underlying financial agreements) that BRI infrastructure projects will require. Various parties, including investors, contractors, local governments, and operational parties, will without doubt become involved in the projects during and much after the construction as well. To resolve contractual disputes arising from such joint ventures, Norton suggests a government-to-government mediation process, judicial resolutions (for, e.g., cases involving local laws in the areas of tax and real estate disputes), and arbitration (which will require a venue and an institution for administering the process).

China enjoys a competitive advantage because oftentimes, it offers the cheapest alternative to building infrastructural projects. However, some glaring issues may arise once the contract has been awarded, including quality assurance, speediness of the work, and meeting deadlines. These issues may lead to the violation of the terms of the contract between the parties as well. This was true for the Guangxi Transmission and Substation Construction Company, the contractor responsible for the first section of the Tamokoshi-Kathmandu Transmission Line Project. After multiple warnings, delays, and only eight percent of the project completed in the 74 percent of the elapsed contract period, the Nepal Electricity Authority finally fired the contractor in late 2018. Currently, the NEA is looking for another contractor who will be given 820 days to complete the remainder of the project.

In late 2018, at the conclusion of the Nepal-China Joint Oversight Mechanism, the officials associated from both countries with various joint ventures in Nepal put forth the issues they were facing in pushing their projects forward. It was reported that the Chinese side was especially concerned with the issues surrounding land acquisition for the projects as well as the ease with which foreign, Chinese works can attain work permits. The Chinese also expressed concerns over the limit on the number of foreign workers per project, an issue that the Nepalese representatives said they would take up with the relevant authorities. Given the complexities of these issues, many expressed that it would take some time before these changes are realized.

The issue of land acquisition spills into the issues of resettlement and rehabilitation of populations that would be displaced by the projects. In August 2018, Nepalese authority expressed that the West Seti Hydropower Project was financially unfeasible due to the high costs of rehabilitation and resettlement. They requested a revision of the contract, which included lowering the energy generation from 740 KW to 600 KW and extending the power purchase agreement to 12 years from 10 years, all the while maintaining the initial award of $1.2 billion. As of January 2019, the project is at a standstill, and the Nepali government has organized a task force to evaluate the future of the project and to produce a report with recommendations.

Issues relating to personnel can also hinder the progress of the projects, causing continued delays. For example, during the construction phase of the Upper Marsyangdi ‘A’ Hydropower Project in Lamjung, workers belonging to trade unions held multiple strikes and sit-ins when the authorities did not heed their demands for minimum wages, retirement benefits, life insurance, and leaves. They also claimed to have been unfairly compensated when compared with their Chinese counterparts and asked for the dismissal of a Chinese foreman accused of “manhandling the workers.” Chinese laborers are supposedly preferred over local laborers due to the language barrier and the finer skill level of Chinese laborers. Similarly, Chinese contractors tend to import from China the materials necessary for construction; this could further increase Nepal’s trade deficit.

As Nepal hopes to secure more investment in infrastructural projects in Nepal from China, it is important to carefully evaluate these challenges and find ways to combat them effectively.

Conclusion
As Nepal hopes to secure more investment in infrastructural projects in Nepal from China, it is important to carefully evaluate these challenges and find ways to combat them effectively. Even after projects have been completed, their functioning could be delayed further for, for example, maintenance, as was the case with the Middle Marsyangdi Hydropower Station that was halted from operation for ten days back in early 2018. It is important for project stakeholders to maintain the terms of the contract and resolve arising issues through arbitration and mediation, as litigation can cost both parties unnecessary capital. It is in the best interest of the country to ensure progress via quick resolutions of arising conflicts, such as those mentioned previously.

[Bipin Adhikari is a constitutional expert. Bidushi Adhikari is associated with Nepal Consulting Lawyers, Inc as a research assistant}

Published: 15-02-2019 07:33