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Chinese Belt & Road Initiative Suffers Due to Hydro Project

In May 2017, a number of memoranda of understanding were signed between China and Pakistan to construct several hydropower projects along the Indus River. The projects, known as the North Indus Cascade, include the development of five hydropower projects with a cumulative hydropower generation of 22 thousand megawatts. As a part of its regional investment, China pledged US$50 billion to the North Indus Cascade. The dams form part of the China-Pakistan Economic Co-operation framework as well as China’s Belt and Road Initiative (BRI).

One of the larger dams planned in the China-Pakistan North Indus Cascade is the Diamer-Bhasha dam. The dam was set to cost over US$8.5 billion ($11.26 billion), and as a part of China’s BRI (the infrastructure and trade structures that would facilitate greater integration between Asia and Africa), China offered Pakistan financial aid to help it build the dam. Citing a number of concerns, Pakistan rejected this offer in November 2017.

The rejection of the agreement terms is a set-back for Beijing’s international intentions. Building the Diamer-Bhasha dam is arguably a key element in China’s BRI. Pakistan, however, rejected the deal because of its strict conditions, including terms that dictated Chinese ownership of the project, and high operation and maintenance costs.

Despite China’s offer to fund some of the project, Islamabad was also finding it increasingly difficult to secure financing from other international bodies due to the proposed dam’s location. The 450 megawatt dam was set to be located along the Pakistani border within the Gilgit-Baltistan territory. India claims this area is part of the contested Kashmir region. Indian objections to the dam have hindered Pakistan’s ability to secure funding from other sources, including a rejection from the World Bank and the Asian Development Bank which have refused to fund the dam because of Indian resistance.

Pakistan’s rejection of the dam agreement comes just days after Nepal withdrew from a hydropower plant agreement with China. The US$2.5 billion ($3.31 billion) dam agreement with Nepal also formed part of China’s BRI. The decision to withdraw from the agreement is further evidence of the difficult balancing act that Nepal maintains in its relationships with China and India. Current political instability in Nepal is complicating the decision about which Asian power to align with, but, for the sake of maximising hydro benefits, it may be wise for Nepal to consider maintaining a relationship between both regional powers.

Both Pakistan and Nepal would benefit from Chinese investment in their infrastructure to create greater water security and provide electricity to millions of people within their respective countries. It seems, however, that in seeking to secure greater influence within the region, China has failed to properly evaluate some of the considerations that other countries may object to. The harsh conditions that China placed on Pakistan in seeking to fund the Diamer-Bhasha Dam, as well as its failure to ensure that India would not be able to obstruct the plans (whether directly or, in this case, indirectly) have landed a blow to China’s investment strategy throughout the region. Beijing may have significant hard power in parts of South Asia, but if it fails to secure politically prudent bilateral agreements, it may continue to experience more resistance to its influence in the region than first expected.

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