Since the launch of the BRI, Europe has launched its own international infrastructure initiative in 2021, the Global Gateway, committing 300 billion EUR by 2027 to enhance comprehensive global connectivity, and expand on the EU’s 2018 Connectivity Strategy for Asia. In addition, many European countries are also signatories to the BRI, 18 EU Member States, including Greece, Hungary, and most recently Italy in 2019. However, there has been much conversation surrounding the geopolitical implications of the BRI and other international infrastructure investment initiatives. For instance, Nepal and China have been butting heads about a handful of infrastructure projects in Nepal that have recently begun operations. China is claiming these projects as part of the BRI, which Nepal rejects. To balance between these global actors, Nepal has undertaken a ‘hedging’ strategy in which they move between cooperating and confronting the neighbouring powers to remain neutral, and maintain their global autonomy while still benefiting from the aid and investments from more powerful states. Understanding the way in which global geopolitics are playing out within this small Himalayan nation can increase European understanding of the BRI and the implementation of its projects in order to improve its own infrastructure initiatives and involvement in the BRI, setting a firm precedent on how to navigate the ambiguity surrounding related investments.
Nepal’s Infrastructure Gap
Nepal has its sights set on becoming a middle-income country alongside its projected graduation from LDC status in 2026. Despite this growth, Nepal faces several development challenges. For one, its location along the Himalayan mountains makes constructing big infrastructure projects difficult, and flooding damages to infrastructure are severe. However, its river systems provide potential for hydro-power development. Yet, as of 2022 only 5 per cent of Nepal’s hydropower potential has been realised. Therefore, Nepal is a prime location for infrastructure development, with high potential for sustainable growth, not only to help Nepali citizens, but also help the world achieve its Sustainable Development Goals (SDGs).
Nepal’s geographic location between two global superpowers, India and China, means that Nepal has found itself in a delicate balancing act between the two, with the primary method of influence on the nation being through development aid and infrastructure investments. This is not new to the country, as during the Cold War 95 per cent of the country’s annual budget was financed through bilateral foreign aid. While this number had dropped significantly in recent years to 24.41 per cent ODA to the national budget in the fiscal year 2020/2021, the country still remains dependent on foreign aid.
Scholars and lawmakers have debated the effectiveness of foreign aid since its ascension to mainstream politics after the Second World War. After its boom, critics began to notice that high amounts of foreign aid can wind up supporting corrupt governments or create an aid dependency where a government is no longer accountable to its people, but instead encourages ‘rent-seeking’ behaviour, spurring internal conflict over foreign funding. While the BRI is not strictly considered ‘development aid’, its relationship with improving connectivity in LDCs through loans often leads to the same questions. As the impacts of the BRI are still being observed, there are mixed reactions to be observed from policymakers and academics. For example, a 2019 analysis from the World Bank shows that global infrastructure would benefit significantly from infrastructure investments, whether from the BRI or other countries’ projects with similar aims. On the other hand, another study has found a correlation between local corruption and Chinese BRI investments. So while the geopolitical implications of aid are critical, the primary focus for aid partners should be on working towards the SDGs and on maintaining the emphasis on aid effectiveness in the host country. As a traditional aid provider, European countries have focused on achieving aid effectiveness in aid recipient countries, but now as signatories to the BRI, European countries may also need to pay attention to the consequences of being a host to BRI investments.
China and Nepal
Nepal signed a BRI framework agreement in 2017. After some discussion, the two countries agreed on nine projects to be implemented under the BRI framework. Bilateral cooperation between the two partners increased in 2019 when Chinese President Xi Jinping visited Nepal and further discussions on the progress of the BRI in Nepal were held. This came along with a general increased interest from China in Nepal. For example, in 2020 over 90 percent of FDI in Nepal came from China, including millions of yuan into hydropower projects. The Nepalese government at the time looked toward this investment as a way to decrease its dependence on India. In 2020, China and Nepal also signed an agreement that gave Nepal access to four seaports and three land ports in China, which is expected to increase activity across the Chinese-Nepalese border. Aside from big infrastructure projects, China began increasing its soft-power and investing in Nepalese capacity-building by connecting the internet between China and Nepal, and paying for compulsory Mandarin subjects in Nepalese schools.
Since 2020, and the outbreak of the Covid-19 pandemic, there has been little progress on the Chinese projects in Nepal. For instance, in 2022 the Kathmandu Post reported that the BRI is “nowhere on the horizon”. This comes as funding towards big BRI projects has slowed overall since the pandemic, while international concerns about the quality of BRI projects have been increasing. The most visible progress towards Nepalese BRI projects is towards a feasibility study for the ambitious Tibet-Nepal railway that seeks to run through the fragile Himalayas. The railway has been called one of the “world’s toughest railways”, and is projected to cost 5.5 billion USD, which is almost equivalent to the entire Nepalese revenue in 2018. While this project has been in the works, other infrastructure such as airports have taken the spotlight between the competing Chinese and Nepalese claims.
Nepal’s Precarious Geopolitical Position and Balancing Act: Increasing Engagement with the United States and India
By viewing the ways that Nepal has been ‘hedging’ between China, the United States, and India the confusion surrounding the BRI projects becomes more clear. While Nepal does not want to tarnish its relationship with India, it also benefits from outside investors such as China and the United States. Being able to make the most from these investments while also not alienating other geopolitical actors is a precarious balancing act for Nepal. Consequently, by understanding the implications of the Nepalese approach, the EU and its Member States can better outline a strategy going forward in regards to its own engagement in geopolitics and with the BRI.
Hedging Strategy with China
On 31 December 2022, after the inauguration of the Pokhara International Airport, China claimed that this was one of its flagship projects under the BRI. However, this created some confusion since Nepalese officials claimed that BRI projects in Nepal have not yet been implemented. They supported their claim by the fact that the Pokhara International Airport was not listed as one of the nine BRI projects in Nepal. The origins of this claim stem from the fact that the airport was funded by a 215.96 million USD soft loan with China in 2016, before the MoU on the BRI was signed, and the construction of the airport was headed by Chinese company CAMC Engineering. Due to general unpreparedness and potential wariness about the Chinese-built airport from Indian leaders, the airport did not welcome its first flight until 21 June 2023. This is not the only project that has faced this kind of confusion. For instance, Chinese Ambassador to Nepal Chen Song tweeted that the Wechat Pay Cross-border Payment Service Inauguration in Nepal was an example of financial connectivity under the BRI. The Nepalese government holds firm in its claims that these projects do not fall under the framework of the BRI. Both countries have political incentives to maintain their respective claims. Nepal feels pressure to maintain amicable relations in the region, as well as a neutral stance in the rising geopolitical tensions between the United States and China. Or as Khadga KC, professor at the Department of International Relations and Diplomacy of Tribhuvan University told the Kathmandu Post “[Nepal] needs to maintain a balanced relationship with these neighbours”. Despite its willingness to work with Chinese infrastructure projects, after seeing Sri Lanka default on its BRI debt and hand over its strategic Hambantota Port to China on a 99-year lease, the ruling party in Nepal has become more wary of Chinese infrastructure loans.
When questioned, Chinese ambassador to Nepal Hou Yanqi has explained that there are multiple modalities through which the BRI operates, and the Pokhara Airport, among other ongoing projects in Nepal, are included in this. Aside from the Pokhara Airport, Gautam Buddha Airport in Lumbini (where the ADB has invested and the Chinese contractors have worked), and the Tribhuvan International Airport in Kathmandu (which is being renovated by a Chinese company and paid for by the Nepalese government) are also under this framework according to Hou.
Following the backlash, the CCP released a concept paper for the “Silk Roadster” platform in Nepal. This platform seeks to enhance technical cooperation between South Asian countries and China, with a focus on smaller projects such as capacity building and training programs. Beijing has clarified that although the initial focus of the BRI was on large infrastructure projects, they are also increasing its scope to include smaller projects, such as the “Silk Roadster” platform. Following its announcement, China committed 8 million yuan for its implementation. However, its announcement made no mention of the BRI, further complicating the communication surrounding the initiative.
Hedging Strategy with India and the United States
Experts are speculating that growing ties between Nepal and the United States and India may explain the mixed claims about BRI projects. Former American Vice President Mike Pence claimed that the BRI is a means for China to use “debt diplomacy” to expand its influence, while Indian President Modi strongly opposes the China Pakistan Economic Corridor (CPEC), due to its proposed passage through contested Kashmir boundaries, one of the BRI’s flagship projects. Modi affirms India’s opposition to the initiative even when all of its South Asian neighbours (Bangladesh, Sri Lanaka, Bhutan, the Maldives, Afghanistan, Pakistan), bar Bhutan, have signed onto it. By distancing itself from the BRI, Nepal may make itself appear more closely aligned with these growing donors, or at least more palatable to these aid-providers.
Closer relations with India may partly explain why Nepal would want to distance its projects from BRI, while it may also provide an incentive for China to emphasise its growing engagement in the country. According to Akhilesh Upadhyay, a Kathmandu-based journalist “India and Nepal are quite close and it would be difficult for China to replace India in that sphere”, specifically because of India and Nepal’s shared culture, language, and social life. During the pandemic, relations with China shrank due to China’s comprehensive zero-Covid policies, whereas trade with India increased, alongside India’s “neighbourhood-first” policy. For instance, nearly 100% of all of Nepal’s trade took place through the Indian border. Increased cooperation was not just through trade, but also through infrastructure projects such as a new railway and two bridges, a transmission line and expanding cross-border oil pipelines, as well as Indian investment into Nepal’s hydropower sector, and allowances for Nepal to utilise India’s power-grids, and transit corridors.
While India has been increasing its regional efforts, the US has also set its eye on Nepal. Early in 2023 Nepal saw an influx of high-level delegation visits from the United States. During these visits, increased investments were announced between the US and Nepal, including a 1 bn USD investment in clean energy, electrification, and small businesses led by women and under-represented communities in Nepal over the next five years. This comes along with the announcements of a 58.5 million USD grant to strengthen inclusive democracy and support civil society organisations from USAID. However, the most controversial American investment in Nepal was the 500 million USD from the American Millenium Challenge Corporation (MCC) towards Nepal’s road networks and electricity transmission lines in 2017, the same year that Nepal signed onto the BRI. Although the offer was extended by the MCC in 2017, it was not accepted until 2022. Upon accepting the offer, the US government extended another 659 million USD aid grant. The controversy surrounding the MCC grant centred around Nepalese aims to remain non-aligned in geopolitical balancing, and fears that the United States was trying to extend geopolitical influence through these investments. Fueling these fears, American officials claimed that the MCC grant was part of the US Indo-Pacific Strategy to counter Chinese influence, although the official US Indo-Pacific Strategy was launched several years after the grant was extended. Seeing the pushback from that statement, American officials reversed it, affirming that the MCC grant was to be separated from the Indo-Pacific Strategy.
Engagement from other international actors has given Nepal greater bargaining power with regards to these foreign investments. With these outside powers seeking to grow their influence, Nepal could benefit from this so-called “race to the top”. With the presence of other actors in the region, Nepal has made their preferred terms clear for these investment projects, with three explicit requests (1) they prefer soft loans and grants as opposed to commercial loans; (2) they would like interest rates and repayment times to be in line with traditional lenders, with interest rates not exceeding 1 percent a year; (3) projects should be open for competitive bidding.
However, the realities of BRI investments up to this point have not entirely been in line with such requests. China has stated that BRI investments come as a mixture of commercial loans and grants, primarily bilaterally with Chinese institutions or state-owned enterprises. Additionally, interest rates on these loans are traditionally 300% higher than loans coming from other donors and western governments, with repayment times also being 12-20 years longer. Finally, projects such as the Pokhara International Airport were not up for competitive bidding, but with new actors in the region there might be more of a push for competitive bidding for such contracts. The pressure has been felt across the globe, as more potential BRI partners have hesitated before signing onto the initiative and related projects due to these concerns. In response, China has made efforts to reform some BRI practices, attempting to make the BRI more “green”, establish its own agency for international development cooperation, and standardise implementation practices.
BRI in Europe
Seeing how these geopolitical dynamics are being played out through infrastructure investments in Nepal, Europe has to consider how this might affect its own infrastructure investments. However, there is a potential for ambiguity surrounding what does or does not qualify as a BRI project, which coupled with the geopolitical focus on the BRI may have heavy consequences. For example, the BRI is already active in Europe, with major projects such as the Piraeus Port and the Budapest-Belgrade railway bringing Chinese investment into EU countries. In 2019 Italy signed an MoU with China on the BRI. However, currently Italian Prime Minister Giorgia Meloni is considering a possible withdrawal from the initiative. Following Meloni’s visit with United States President Joe Biden, Italy’s Defense Minister Guido Crosetto even stated that Italy joining the BRI was an “improvised and atrocious” decision. This comes as interactions between China and Italy have not majorly improved since the signing of the MoU, although the Covid-19 pandemic has certainly affected this. However, Crosetto has mentioned concerns of a potential weakening of the Sino-Italian relationship following a possible withdrawal from the initiative. This fear is reiterated with the Global Times, a Chinese English-language state media publication, saying that Crosetto’s comments are “inappropriate” and that Italy will “regret” a withdrawal from the initiative. Nevertheless, Meloni is adamant that China and Italy can retain good relations without having to be an official signatory to the BRI.
European officials and academic institutions have signalled fears about the levels of transparency in BRI projects, in both the procurement systems and contracts. Speculation that the potential Italian withdrawal is coming after the US and EU have increased pressure on Italy to do so, reveals the heightened geopolitical consequences surrounding international investment initiatives. The BRI’s ambiguity and the fear that any Chinese investment will be attributed to the initiative with potential geopolitical consequences has led to widespread scepticism around almost all Chinese investments in Europe. For example, Germany has not officially signed an MoU with China on the BRI, however recent investments by Chinese shipping company Cosco Shipping Ports Ltd. (CSPL) in a port in Hamburg has been embedded into the larger discussions surrounding the BRI and investments in Europe in a wider context. This may leave Europeans wondering if the confusion that transpired in Nepal is not so far off for Europe as well. So, following the developments in Nepal, it is important that European countries participating in BRI projects publicly delineate with their Chinese partners what the BRI entails exactly for their respective country. By making this information available for competing investors, other actors may not feel pressure to counter the engagement. Therefore, European and other countries can avoid getting pulled into the geopolitics that are being played out through infrastructure investments.
How to address these concerns
From the European perspective three conclusions can be made. First, seeing the ways that geopolitics are being played out through infrastructure initiatives leads the international community to wonder to what degree these investments are achieving their goals of helping LDCs? To achieve this donor countries must prioritise development and connectivity first and geopolitics second. While this is outlined in Europe’s plan to achieve aid effectiveness, it is clear that this is not always the case. Whether or not it is through the new age of infrastructure initiatives or through traditional channels of ODA, Europe may have the opportunity to address some of the structural challenges that LDCs are facing and fight for a more sustainable future. Secondly, LDCs may be able to utilise global competition between superpowers as a sort of ‘barter economy’ for aid, achieving the highest levels of investment by utilising a ‘hedging’ strategy between superpowers, but European countries rely on both the American and Chinese markets to sustain their economies, and isolating one partner would lead to economic distress. Finally, addressing the challenges associated with their own involvement in the BRI, such as potential pressure from American or Chinese partners, may leave European countries in a potential zero-sum game. By clearly delineating the potential risks, benefits, and specific projects under given initiatives, European countries may be able to avoid being used as a pawn in global power balancing.
Overall, for the world to continue to develop towards the UN’s SDGs, there must be an international effort to improve the infrastructure in countries like Nepal. For Nepal to harness its potential, it must focus on enhancing its infrastructure, promote sustainable development, and strengthen its partnerships with international actors like the EU and China. In recent years, the EU and Nepal have deepened their cooperation in various sectors, such as education, trade, and renewable energy. The EU has been a significant contributor to Nepal’s development efforts through financial aid, technical assistance, and capacity-building programs. To further strengthen this partnership, Nepal can focus on leveraging the EU’s expertise in areas like sustainable tourism, clean energy, and disaster management. Collaborative initiatives could be undertaken to preserve Nepal’s cultural heritage, promote responsible tourism, and develop sustainable infrastructure projects that benefit the local communities, all while retaining a focus on aid effectiveness. One potential approach to promote collaboration between the EU, China, and Nepal, without fueling the geopolitical tensions, is through the pursuit of triangular, or trilateral, cooperation. However, in order to successfully pursue cooperation between China and the EU there must be transparency standards upheld that clearly define what falls under the BRI, both for the EU itself and for its partners around the world, like Nepal.
Author: Cora Fagan, EIAS Junior Researcher
Photo credits: Pixabay