Precarious Nepalese Reconstruction Efforts Could Be Bolstered By New China-Leaning Government

Two and a half years after Nepal`s worst earthquake in over 80 years, the scars it left are still evident across the country. In the Kathmandu Valley, home to about 20% of the population, piles of rubble and roofless buildings are a common sight. Many temples in the centre of Kathmandu, Patan and Bhaktapur have been damaged beyond recognition. While scaffolds have been erected around some of the larger temples, smaller ones are propped up by wooden beams.  The most seriously damaged are little more than piles of bricks and tiles, and are cordoned off.

Nepal`s infrastructure was also severely hit, and while the country`s communications network was restored soon after the earthquake, there are now tangles of telephone and electricity cables along many streets.  Operations to restore transport networks are ongoing, yet a high proportion of Nepal`s roads remain heavily potholed.

Despite over $4 billion of international aid pledges since the 7.8 magnitude earthquake in April 2015, reports suggest that less than 10% of the worst-affected citizens have begun to rebuild their homes. In Kathmandu, earthquake victims beg on the streets for food and water. The government’s decision in March to bulldoze a relief camp in the capital, where nearly 2,000 survivors lived, has not helped the situation.  While officials claimed the action was taken to encourage people to return to their villages and start rebuilding them, the financing for reconstruction does not appear to be forthcoming.

I spoke to a number of locals whose properties were damaged, and it was evident that very little has reached those most in need. These people told me that they lay most of the blame at the feet of the government, accusing the National Reconstruction Authority of failing to deliver promised funds to worst-hit areas in the aftermath of the quake.

The authorities’ apparent failure to disburse funding is widely attributed to a combination of political instability and inefficient aid delivery mechanisms – although some I spoke to suspect that corruption may have been a factor.  That perception is not surprising given that Nepal is ranked as the third most corrupt country in South Asia by Transparency International. Some wonder whether graft is also eroding public finances. But local NGO and media sources told me that while only 50% of this year’s budget had been deployed to date, they understood the underspend would be carried over into 2018. They thought little of it would be pocketed by dishonest Nepalese officials.

As a result of the authorities’ poor record on aid delivery – which officials blame on bureaucratic hurdles – many NGOs and foreign governments, in particular Beijing, have taken on reconstruction responsibilities themselves. Not only has China sought to assist with the post-earthquake recovery, it is furthering its strategic interests too, notably building a railway line between its restive autonomous region of Tibet and Nepal.  The project, part of China`s ‘One Belt One Road’ policy to improve Eurasian transport infrastructure, will boost Nepal`s ability to trade with the Asian giant when completed in 2020.

Along with Nepal, China has also invested significantly in Pakistani infrastructure, and this month Chinese President Xi Jinping indicated that discussions to form an economic corridor between China and Myanmar are at an advanced stage following the visit of Myanmar`s State Counsellor Aung San Suu Kyi.  New Delhi sees growing Chinese influence in Nepal as a threat to the Indian economy and worries that Beijing will exploit Nepal’s 1,088 mile border with India to export Chinese products to the latter.

While Nepal has strengthened its ties with China, its relationship with India, which still holds a monopoly over the Nepalese market, has deteriorated significantly in recent years.  Kathmandu blames New Delhi for a five-month blockade of the Indo-Nepal border between September 2015 and February 2016. The minority Madhesi community in the south of Nepal – closely related to the Indian population across the frontier –  disrupted traffic in protest over a new constitution, which they claimed disadvantaged them. Their actions caused severe shortages of oil and cooking gas.

The geopolitical battle for influence over Nepal cast a long shadow over last week’s final round of voting in elections to the national parliament and new provincial assemblies.  The Left Alliance, comprising former Maoist rebels and moderate communists, looks to have triumphed in the December 7 vote, and is now poised to form the next government and control most of the regional administrations. The outcome favours China, and could have significant implications for Nepal’s recovery. With friendly authorities in place in Kathmandu, Beijing might step up investment in infrastructure projects.

The Left Alliance appears to want to distance itself further from India as Nepal seeks to reduce its reliance on its southern neighbour. The coalition`s manifesto includes plans to terminate the India-Nepal Peace and Friendship Treaty, a bilateral agreement allowing the free movement of people and goods between the two countries. However, Nepal does not aim completely to cut its ties with India: a new trade deal is expected to replace the treaty if it is abolished.

For those worst hit by the earthquake, the possible geopolitical implications of the poll are of little concern. Their immediate needs are more basic. They hope that with the Left Alliance in power, there will be a renewed focus on reconstruction efforts across the country.

 

Freddie Kleiner is an analyst at Alaco, a London-based business intelligence consultancy.

 

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

Make In India: Still Falling Short After Three Years

Make in India is the government’s flagship program to revitalize the country’s flaccid manufacturing sector. When it was launched in 2014, Make in India stole headlines across the world – Prime Minister Narendra Modi and his government would finally make manufacturing in India viable. The initiative would attract foreign investment to grow the manufacturing sector, and create jobs for those that need employment. Many India hands thought Make in India would help the economy realize breakout growth.

Wieden + Kennedy deserve a lot of credit – Make in India set the stage for the new government. The broad policy direction was everything that India’s economy seemingly needed: removing barriers to foreign investment, improving the ease of doing business, as well as encouraging the development of infrastructure and the workforce. But after three years, what has changed?

The government removed most FDI barriers, but shock (demonetization) and poorly implemented (GST) reforms have caused some foreign investors to feel uncertain about India. The Smart Cities and Skill India initiatives – designed to create modern infrastructure and up-skill the labor pool, respectively, are great ideas, but have become social media bait for online trolls.

In a more competitive policy environment, Make in India would likely have been deemed a failure. This government is still struggling with basic industrialization and mass employment when other governments – like China – are developing technology-driven industry. The now-in-opposition Congress party had set the bar very low by 2014, making Modi’s Make in India platform look like a godsend, but India now needs something more than a good public relations campaign.

Make in India: A bird’s eye view

Make in India can count relaxed FDI Norms, improved investor perception, and a surge in automotive and electronics manufacturing among its successes.

The government liberalized FDI policy by allowing automatic route for over 50 percent investment in 25 sectors including railways, defense, medical instruments, and telecom. Consequently, the FDI inflow grew by 20 percent in 2014-15 and 2015-16.

In 2016-17, the country attracted its highest ever FDI of US$60 billion. Significantly, the manufacturing sector saw a 38 percent increase in investment in 2016-17.

Major firms including General Motors, Apple, and Foxconn name-checked Make in India when announcing big ticket manufacturing projects in the country, while countries including Japan, South Korea, Sweden, and Germany have pledged larger investments and technical support to India. In the most recent example, the Japanese Prime Minister committed to investing across sectors – automotive manufacturingstartups, and infrastructure.

Manufacturing activity has certainly picked up in the country. Data published by DIPP in December 2016 shows that industrial activity rose by 29 percent during 2015-16 over the previous fiscal. Much of this growth is concentrated in three states – KarnatakaMadhya Pradesh, and Maharashtra, which were in any case already established manufacturing bases.

Ultimately, however, Make in India has not resolved all the issues that it set out to do.

India’s manufacturing and transport infrastructure is also severely inadequate to enable businesses to conduct their operations smoothly. The government has initiated six major industrial corridors, dedicated railway freight corridors, and port development projects, but none of them are operational – optimists project 2019 as possible.

FDI inflows show that much of the funds are diverted towards stressed assets or brownfield projects. In 2015, nearly 23 percent of the total FDI inflow were invested in brownfield projects, increasing to 48 percent in 2016. Indeed, several global companies including US-based JC Flower and Apollo Global Management; Canadian fund Brookfield Asset Management; and, China’s Shanghai Fosun Pharmaceutical have set up joint ventures in India to buy up stressed assets.

India’s rank in the World Bank’s Ease of Doing Business has risen, but not many businesspeople will say that business in India has gotten any easier. As an example, there has also been a spurt in the number of stalled economic activities since September 2016. Economic projects – including in the infrastructure, manufacturing, and services sectors – are often stalled due to lack of government clearances, funds, raw materials, and other resources.

As of September 2017, the value of stalled projects stood at US$204.26 billion (Rs 13.22 trillion). In percentage terms, about 13 percent of all projects have been stalled, two-thirds of which are in the private sector. In the manufacturing sector, the stalled projects constitute about 25 percent of all activities in the sector. This trend has disturbed prospective investors, and resulted in a significant drop in the number of new projects announced this year.

Sudden, and at times contradicting, policy measures by the government is affecting businesses’ ability to plan their processes in advance. For instance, frequent changes in the GST rules is causing an environment of confusion and uncertainty in the economy. In another recent example, the luxury auto industry was blindsided by the government when the maximum levy was almost doubled, immediately after GST rates were set. Last year’s demonetization exercise also crippled manufacturing supply chains, leading to reduced industrial and shrinking retail activity.

Make in India overlooks broader manufacturing transformation

Make in India has had a patchy, and rather subdued, impact on the Indian economy so far. While the initiative succeeded in creating new interest for investing in India, it has not been able to transform it into any significant rise in manufacturing activity. In fact, recent economic shocks delivered by a poorly implemented demonetization and GST have dampened investor sentiment, neutralizing Make in India’s impact.

Further, the global value chains that ushered in manufacturing hubs in East Asia are now rapidly transforming. Businesses no longer rely on cheap labor for production purposes, but are instead adopting technologies such as 3D printing and smart automation. The technology-driven ‘fourth industrial revolution’ or Industry 4.0 is changing the fundamentals of manufacturing processes. World over, major manufacturing giants are rapidly adopting robotics in industrial units. Robotics in Chinese manufacturing units, for example, is likely to grow by 150 percent in 2018.

Recent political developments have also increased protectionism in Western economies, which were traditionally the destination for goods made in East Asia. Export-dependent manufacturing may no longer be a viable economic model for emerging economies to emulate.

India must quickly adapt its policies to reflect the changing nature of the industry. The government is already revamping the National Manufacturing Policy, and revising Make in India to accommodate these changes. It is seeking to modernize its digital infrastructure to support the new era of manufacturing. But is it too little, too late?

The country cannot rely on big-ticket industrial units alone to transform into a manufacturing hub. It must create a positive environment for small and micro businesses to function and grow in. Policies for these businesses must include flexible credit instruments, good industrial linkages, relaxed labor norms, and provision of some managerial assistance for scaling up businesses.

Until the government develops the political willpower to take up these challenges, the burden will remain on the private sector to find trusted partners on the ground in India.

 

Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Vietnam and the Asian region.

 

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

Power Sans Control On Belt and Road: China’s Control Over The AIIB is Eroding

As the Asian Infrastructure Investment Bank matures, it emancipates from its Chinese parent. But the multilateral development bank remains a key instrument of China’s foreign and development policy.

Eighteen months after starting operations, the Asian Infrastructure Investment Bank (AIIB) is still in its infancy. However, the newest multilateral development bank has already declared independence from its Chinese parent. Last month, at the AIIB’s second Annual Meeting, President Jin Liqun drove a wedge between his institution and China’s flagship foreign policy and development initiative. “There has been some confusion,” he said, about the relationship between AIIB and the Belt and Road Initiative (BRI – formerly known as ‘One Belt, One Road’ or OBOR). “We operate by our standards, by our governance. The Belt and Road is a marvelous program … but we have our standards”.

On the face of it, this statement is surprising. Both proposed by China in 2013, the AIIB and the BRI have in common not only a progenitor and a birth year, they also share a same purpose: to improve infrastructure connectivity in Asia. In fact, the raison d’être of the AIIB is to implement the BRI’s hard infrastructure agenda.

By design, the BRI overwhelmingly relies on bilateral channels for its implementation. A large share of the financing for infrastructure projects indeed transits via China’s so-called ‘policy banks’ and ad hoc funds. In May, at the first BRI summit, President Xi Jinping announced an additional $70 billion for the BRI infrastructure component to be delivered via such institutions, namely the China Development Bank, the EXIM Bank, and the Silk Road Fund. Although significant, China’s commitment pales in comparison to BRI’s total cost, estimated in the trillion of dollars. Well-aware of this shortfall and of the financial risks involved, the Chinese leadership has made mobilizing external resources a priority from the outset. The establishment of the AIIB, which leverages capital from its member countries to finance infrastructure projects, intervened in this context.

Four years later, the reality of the AIIB as a Chinese-made vehicle built to work in tandem with China’s bilateral institutions to implement China’s foreign policy and development initiative is in question. From a Chinese object, the AIIB has evolved to acquire a life of its own as a multilateral institution. This emancipation of the AIIB has consequences for its operations, and potentially for its mandate.

Into Bretton Woods

The choices on staffing, policies, and strategies that the AIIB made to date reveal an institution created much less in China’s image than in that of the traditional multilateral development banks. Of course, the divergence of the AIIB from the Chinese model can be explained by its very nature. As a multilateral bank that borrows on international markets to finance its operations, the AIIB must abide by the standards and norms established by its Bretton Woods peers. However, another, unforeseen factor contributed to shaping the AIIB into an institution that is conceivably much different than the one China originally envisioned.

With 80 member countries so far, the AIIB’s attraction is as undisputed as it was unexpected. Paradoxically, this international success has come at a cost for China, which has been compelled to forge compromises on the AIIB’s governance and operational policies. For instance, the AIIB’s environmental and social framework and its new energy strategy bear the mark of the AIIB’s European members. They mirror the standards and rules adopted by the World Bank and the Asian Development Bank.  As more countries join in, China might also feel pressed to reduce its voting share, in effect relinquishing its veto power.

Power sans control

Even as China’s control over the AIIB is eroding, the multilateral development bank remains instrumental in the success of BRI – giving the Xi administration no reason to resist this evolution. To be sure, the current balance of power within the AIIB still enables China to harness the financial firepower of the bank, whose formal mandate aligns with the BRI goals. Since it started operations, the AIIB has approved 16 projects for $2.5 bn, most of which fall under the BRI umbrella. At capacity, the AIIB will have a portfolioexceeding $100 billion (and scalable to $250 billion), mostly focused on Asian infrastructure.

Furthermore, the multilateral setting enhances the inclusiveness and legitimacy of the AIIB, thereby allowing China to leverage the resources of participants that otherwise object to the BRI. India is a case in point. The country has long voiced its opposition to the BRI, citing the strategic implications of infrastructure development in the China-Pakistan Economic Corridor and in Pakistan-controlled Kashmir. At the same time, as a founding member and the host of the AIIB’s 2018 Annual Meetings, India has been an eager player in a collective institution that contributes to the BRI but steers clear of its most controversial activities. By statute, the AIIB cannot finance operations in disputed areas without the consent of all parties.

In this perspective, China’s dominance of the AIIB is at best expendable and at worst detrimental to the country’s foreign policy and development objectives under the BRI. At present, China can fully exploit the emerging division of labor between the AIIB and its bilateral institutions. Under this informal modus vivendi, multilateral capital would be applied to the infrastructure projects that present a sufficient case in terms of financial or economic viability, in line with the AIIB’s financial constraints. Chinese bilateral resources would be directed to the residual projects that find their core rationale in strategic objectives, such as dual-use infrastructures.

Out of Asia?

There remains, however, a distinct possibility that the AIIB will gradually spiral out of China’s orbit. Of the 23 countries that have joined the AIIB in 2017, 12 hail from outside the greater Asia region. As more non-regional, borrowing member countries join the AIIB, the multilateral development bank may shift the current focus on regional infrastructures to a more universal mandate, at the expense of the BRI. In such scenario, the AIIB and BRI would no longer align but merely intersect, leaving China to shoulder alone the burden of the Belt and Road.

 

Remy Stuart-Haentjens is a Contributing Analyst at Global Risk Insights, as originally appears at: http://globalriskinsights.com/2017/07/china-aiib-belt-road-power-sans-control/

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

Silk Road Investment Forum

The Silk Road Investment Forum to be held at Asia House on 06-07 April 2017 is the premier event for Eurasian infrastructure investment. It will bring together the leading investors, advisors, officials, contractors and suppliers contributing to successful Silk Road initiatives. To become part of the most significant infrastructure program in modern history, register now for the Silk Road Investment Forum in London 06-07 April 2017: http://www.claretconsult.com/events.html

On January 18, the first direct freight train from China arrived at Barking Rail Freight Terminal in London after an 18-day journey covering 12,000 km. London thus joined Hamburg, Madrid and Milan in offering direct rail connections to China. The Hamburg service began in 2013, the same year China’s President Xi Jinping outlined a bold and ambitious vision for infrastructure development. The “One Belt, One Road” (OBOR) Initiative includes the Silk Road Economic Belt and the Maritime Silk Road, referencing the historic trade routes that once linked East and West.

East-West trade is again on the rise. The EU now ranks as China’s largest trading partner and China ranks as the EU’s second largest trading partner. Trade has fueled cross-border infrastructure investment, with Chinese firms investing in European power plants, ports and electric bus factories while European firms remain among the top investors in China. Domestic investment in trade infrastructure is also on the rise as transportation and logistics companies fund upgrades and expansions. Between East and West lie critical regions that have only just begun to realize the benefits of the new Silk Road. These include Central and Eastern Europe, the Caucasus, Central Asia and South Asia, each of which is abuzz with new investment projects to support trade, development and economic growth.

 

Innovative investment vehicles are driving Silk Road infrastructure investments. Chinese, Western and local firms have formed joint ventures (JV) for specific projects. Public Private Partnerships, including traditional project finance vehicles as well as broader partnerships between private firms and public entities including national railway companies, have offered tailored solutions for specific types of investments and services. The European Bank for Reconstruction and Development (EBRD) has expanded its operations and increased its lending in key Silk Road regions and just last year welcomed China as its newest shareholder. New multilateral institutions, including the New Development Bank (NDB) and Asian Infrastructure Investment Bank (AIIB) have arrived to provide additional financing for expansive infrastructure investment programs.

While China’s One Belt, One Road initiative stands out for its scale and scope, it finds common cause with existing initiatives to integrate Eurasia. For example, the Central Asia Regional Economic Cooperation (CAREC) Program is a partnership of 11 countries and six multilateral organizations. Since 2001, CAREC has mobilized nearly $30 billion in infrastructure investments. The Transport Corridor Europe-Caucasus-Asia (TRACECA) Intergovernmental Commission and Permanent Secretariat support multimodal transportation networks throughout the region and integration with the EU’s Trans-European Networks (TEN).

Central and Eastern Europe, which straddles the EU border, is engaged with China through the 16+1 initiative to foster cooperation, development and economic growth. The €2.5 billion Belgrade-Budapest High Speed Rail project is just one result of this dialogue. China’s BYD, the largest manufacturer of rechargeable batteries in the world, recently announced a €20 million investment in an electric bus assembly plant in Hungary. In November 2016, a direct freight train from China arrived in Latvia’s capital Riga. The new freight service will connect with the planned Rail Baltica project once it is built.

The Caucasus stand to gain immensely from the new Silk Road. DHL now relies on a Trans-Caucasus route for service between China and Turkey. After crossing Kazakhstan, goods are ferried across the Caspian Sea to Baku then transported overland to ports on Georgia’s Black Sea coast. Last year, the Anaklia Development Consortium (ADC), a JV between US firm Conti Corp and TBC Holdings of Georgia, was awarded a contract to build a $2.5bn deep sea port in Georgia. APM Terminals is expanding Poti Sea Port further down the Georgian coast. Baku will host the crossroads of this new Silk Road route and the North-South corridor connecting Iran to Russia and Western Europe. The EBRD recently pledged support for the North-South corridor.

Central Asian countries have positioned themselves to reap huge benefits from Silk Road trade and investment. Kazakhstan Temir Zholy (KTZ, or ‘Kazakh Railways’) has pledged $44 billion to reduce travel times between China and Germany. In partnership with DP World, it operates the Khorgos Eastern Gate Special Economic Zone on the Chinese border. In December 2014, KTZ inaugurated service through Turkmenistan to Iran. The rapprochement between Iran and the international community is opportune for the Silk Road since the country is a veritable keystone along the route. India recently announced plans to invest $500 million in the Chabahar port project in Iran which will provide key access to Afghan mining projects. In turn, these investments will link to the recently launched Turkmenistan-Afghanistan railroad that will eventually extend to Tajikistan. Such initiatives tie in with ongoing efforts such as the US-backed Central Asia South Asia Power Transmission Project (CASA 1000) and Turkmenistan-Afghanistan-Pakistan-India (TAPI) Pipeline.

Pakistan was one of the first countries to benefit from China’s new Infrastructure Diplomacy with the China-Pakistan Economic Corridor (CPEC), a $46 billion program of investments focused on power and transportation. The effort will link Gwadar Port in Pakistan via road, rail and pipeline to China’s western border. The British High Commissioner for Pakistan recently announced the UK would become an active participant in CPEC.

Summary

Silk Road initiatives support the integration of Eurasia through investments in infrastructure that offer benefits from China to the UK. While China’s OBOR may be the most recent and ambitious Silk Road program, it is builds on a number of previous efforts. As evidenced by recent successes, the Silk Road program offers opportunities for a wide range of stakeholders, including Western companies and host country governments.

The Silk Road Investment Forum to be held at Asia House on 06-07 April 2017 is the premier event for Eurasian infrastructure investment. It will bring together the leading investors, advisors, officials, contractors and suppliers contributing to successful Silk Road initiatives. To become part of the most significant infrastructure program in modern history, register now for the Silk Road Investment Forum in London 06-07 April 2017: http://www.claretconsult.com/events.html.

 

Brien Desilets is the Founder and Managing Director of Claret Consulting.