China’s new troubles in Nepal

In a major blow to Chinese engagement in infrastructure development in the Himalayan region, the Nepali Army (NA) on June 3 temporarily suspended the contract of two Chinese companies working on the Kathmandu-Terai Fast Track for failing to expedite construction. The army had signed two separate contracts, worth some Rs 25 billion, with China State Construction Engineering Corp. Ltd and Poly Changda Engineering Co. Ltd on 14 May 2021 for the construction of three tunnels, a few bridges, and a partial road under the project. One group in the army was reportedly reluctant to suspend the contracts.

The suspension happened in the backdrop of growing Nepal-US rapprochement after the July 2021 government-change in Kathmandu, followed by Nepal’s clear position on developing BRI projects ‘only’ under Chinese grant/assistance or investment. There was a brief diplomatic squabble via media between the US and China over the ratification of the MCC compact by the Nepali parliament. While China attempted to prevent the ratification, the American response was interpreted by Global Times as interference in Nepal’s internal affairs.

In fact, Chinese Foreign Ministry Spokesperson Wang Wenbin on 18 February 2022 stated that “China opposes coercive diplomacy” while commenting on news that the US had urged Nepal to endorse the compact. Moreover, there has been a flurry of high-level visits from the US, including of Under-Secretary of State Uzra Zeya on 20 May 2022. Nepal Army chief and Prime Minister Deuba are scheduled to visit the US in June and early July respectively.

The contract was given to Chinese companies during the tenure of CPN-UML’s KP Oli as prime minister, who is commonly seen as a pro-China leader, despite the parliamentary Public Accounts Committee’s (PAC) advice to follow due process. The same contact has been suspended by the ruling Congress under Sher Bahadur Deuba, who is known for his pro-US bent.  Earlier, the Budhi Gandaki project, which was allocated to a Chinese developer by UML-Maoist coalition government in June 2017, was similarly canceled in November 2017 by a Congress government. There is a strong belief among Indian business community and policymakers that Indian projects face inordinate clearance delays at concerned ministries whenever there is a left government in Kathmandu.

Broadly, there are two reasons for the suspension of Chinese contracts. First, the government found that the Chinese contractors have failed to maintain the desired work pace. In a review meeting in January 2022, a parliamentary committee had directed concerned ministries to expedite the Kathmandu-Terai-Madhes fast track project.

Second, the CPN-UML government had overruled the PAC’s April 2021 directive which found that the army had flouted the country’s financial regulations in giving the contract to Chinese companies. The army had selected only two of 43 interested companies as suitable. The PAC had instructed a halt to the contract process as it lacked transparency. The committee had also instructed the Public Procurement Monitoring Office to remove obstruction by preparing necessary documents, guidelines and procedures as soon as possible while proceeding with the contract for the participation of international companies. This could have been one reason behind the misunderstanding between the then CoAS and the former Defence Minister, Ishwar Pokharel who was sacked by Prime Minister Oli in October 2020.

Taking into consideration the PAC suggestions, which were ignored by the Oli government while giving the project to two Chinese contractors, the Congress government has put the contract under review and ordered a temporary halt.

This is not a new thing with Chinese companies and contractors in Nepal. Media reports speak of frequent clashes between Nepali and Chinese workers and delays in delivery of projects across the country. Interestingly, most of these cases are either suppressed at the government level or misinformed to the media under Chinese pressure. For example, China Railway Construction Corporation (CRCC), which was responsible for road-building in Nepal's Sindhupalchowk district, witnessed local resistance over landslides and damages to houses in June 2021. Similarly, the China-sponsored Damak Clean Industrial Park faced stiff opposition from locals in January 2021. The Butwal-Narayanghat road section expansion project was delayed due to protests by laborers demanding minimum wage.

The Chameliya project has seen cost overruns and the contractor being dragged into a corruption case. China Gezhouba, which bagged the engineering procurement construction (EPC) contract of Upper Trishuli 3A, unsuccessfully tried to upgrade the project's capacity to 90 MW in 2013, flouting the contract document. Further, the government had to terminate the contract with China Railway 15 Bureau Group because of slow progress in tunnel-digging works of the Melamchi Water Supply Project. Chinese contractors have also been blamed for delays in building a substation of a transmission line at Dhalkebar as well as the Kulekhani III Hydropower Project.

After their tactic of acquiring projects through political means and flouting contract norms failed, Chinese Embassy officials in Kathmandu started criticizing the new Deuba government over delays in allocating projects to Chinese companies. Speaking at a virtual press meet on 22 April 2022, Chinese Ambassador to Nepal Hou Yanqui said “the policy inconsistency of the Government of Nepal has put Chinese investors into trouble.”

Moreover, China has been dissatisfied with the Congress government’s decision to build Budhi Gandaki with national investment. At the same time, China understands the importance of having a left government in Kathmandu to address its security (Tibet) concerns and safeguard economic interests in the Himalayas. So China would want a return of a communist government after the forthcoming parliamentary elections.

The author is a Research Fellow, MP-IDSA. Views are personal