Nepal asks China to convert PIA loan into grant

Prime Minister Pushpa Kamal Dahal announced that diplomatic efforts have been initiated with China to convert a loan for Pokhara International Airport to a grant as it failed to garner income, instead piled up more debt.

This came after opposition lawmaker Chanda Chaudhary raised questions about the increasing loss and piling debt, Nepal Prime Minister said that talks are underway to convert the loan into a grant.

“In order to operate the flights to and from the Pokhara International Airport, a committee has already been formed to study government-private sector cooperation. On the basis of the report prepared by the committee, necessary preparations would be made for the operation of the airport. The loan acquired for the construction of Pokhara International Airport, diplomatic talks are underway to convert it into a grant. Necessary coordination would be made for all the necessary financial management,” PM Dahal said.

The Pokhara International Airport, opened on 1 Jan 2023, hasn’t seen any frequent international flights except for chartered Chinese flights, which appear on rare occasions.

On 21 March 2016, Nepal and China reached a loan agreement stipulating a total loan amount of 1.37bn Chinese yuan, out of which 355.9m Chinese yuan were constituted as interest-free-loans. The Civil Aviation Authority of Nepal (CAAN), the aviation regulating body of the Himalayan nation, is responsible for paying the loan amount by the year 2036.

Earlier, Nepal PM Dahal, upon returning to Kathmandu last year after his visit to China, announced that Chinese flights would come to Pokhara, helping to cover the loss.

While no such flights have commenced, the Prime Minister, referring to the visit, claimed, "During my recent visit to China (22 Sept 2023), a theoretical agreement was reached about commencing connecting flights from various cities of China to Pokhara, and I believe that international flights would land at Pokhara International Airport and help recover the loss.”

Days before the inauguration of the airport last year, the Chinese Ambassador to Nepal claimed in a tweet that the airport was a part of the Belt and Road Initiative (BRI) which was rejected by the Nepal Government.

But soon after the handover, the Pokhara airport exemplified the perils that came with importing China’s infrastructure-at-any-cost development model, disproportionately benefiting Chinese firms at the expense of the borrowing nation.

China CAMC Engineering, the construction division of state-owned conglomerate Sinomach, played a pivotal role in the Pokhara airport project. It imported building materials and machinery from China, and the airport itself was brimming with Chinese-made security and industrial technology. Despite China’s claims about the project’s quality, an investigation by The New York Times revealed an unsettling narrative.

Multiple individuals involved in the project and a thorough examination of thousands of documents indicated that China CAMC Engineering had consistently dictated terms to maximize profits and protect its interests. Simultaneously, it systematically dismantled Nepali oversight.

As a consequence, Nepal found itself entangled in significant debt to Chinese creditors without the expected influx of passengers to repay the loans.

The Finance Ministry of the Himalayan nation had signed a memorandum of understanding supporting CAMC’s proposal in 2011, even before an official bidding process had started. The Chinese loan agreement exclusively allowed Chinese firms to bid for the project.

CAMC initially submitted a bid for $305m, nearly double Nepal’s cost estimate

for the airport. This drew criticism from Nepali politicians, who accused the process of being rigged and the price inflated. Following the outcry, CAMC lowered its bid to $216m, reducing the cost by approximately 30 percent.

In 2016, China and Nepal formalized a 20-year agreement for the project, with a quarter of the funding provided as an interest-free loan. Nepal intended to borrow the remainder from China’s Export-Import Bank at a two percent interest rate.

As construction progressed, glaring issues came to light. The Civil Aviation Authority of Nepal was responsible for overseeing the Chinese contractor, but the lack of experienced personnel, combined with the inadequate allocation of funds for consultants, hampered the project.