China Eximbank provides RMB 1.02 billion government concessional loan for Pokhara International Regional Airport Construction Project (Linked to Project ID#71852)

In 1971, DIWI, a German consulting engineering firm, undertook the site selection work, detailed engineering work and a master plan for the construction of a regional international airport in Pokhara, a major tourism hub in Nepal. The work was performed for the Department of Civil Aviation with support from an Asian Development Bank (ADB) loan. Then, in 1975, the Government of Nepal acquired more than 3,106 ropanies of land for the project. A detailed project report was prepared in 1989 for Japan International Cooperation Agency (JICA), proposing a 2,500-meter-long runway with a terminal and cargo building. At that time, the airport was estimated to cost $39.6 million. Then, in 1993, a detailed engineering survey was conducted by the Department of Civil Aviation. During the mid-1990s Maoist insurgency, the hospitality sector in Pokhara almost collapsed and the airport construction project was halted. The construction of the airport did not move forward until the tenure of Prime Minister Baburam Bhattarai in 2011. Talks between Chinese companies and Nepali politicians took place, led by Finance Minister Barsha Man Pun and Minister for Tourism and Civil Aviation Post Bahadur Bogati. Then, on September 20, 2011, a memorandum of understanding (MOU) was signed, on the Government of Nepal’s behalf, by Barsha Man Pun, and Lui Shengcheng, Regional General Manager of China CAMC Engineering Co. Ltd. (CAMC), at the Ministry of Finance in Singha Durbar. The then energy minister Posta Bahadur Bogati and Chinese Ambassador to Nepal Yang Houlan also attended the signing ceremony. Following the signing of the MoU, Nepal’s Finance Ministry instructed the CAAN to invite bids for the construction of the regional airport. However, it later came to light that the Government of Nepal had committed to support CAMC’s bid to win the airport construction contract. This revelation occurred when Nepali Congress leader Deep Kumar Upadhyay circulated the MoU at a meeting of the parliamentary Public Accounts Committee (PAC), which later summoned Tourism Ministry and Civil Aviation Authority of Nepal (CAAN) officials over the controversy created by the short deadline given to bidders. The MoU specified that ‘the Government of Nepal shall provide CAMC solid and substantial support’ in the tender for an engineering, procurement and construction (EPC) contract that that CAAN would issue for the construction of the regional international airport. Suspecting corruption, the PAC criticized Government of Nepal officials for allowing only a short deadline to the bidders. The Commission for Investigation of Abuse of Authority (CIAA), suspecting irregularities, also intervened, asking the Finance Ministry for more details about its interactions with CAMC. As the project became engulfed in controversy several hundred local protesters knocked on the doors of the government headquarters at Singha Durbar, demanding that the construction of the proposed regional international airport in Pokhara begin immediately. In the wake of the controversy, Finance Minister Barsha Man Pun said the Government of Nepal had scrapped all such MoUs. Then, following intense pressure from political decision-makers, CAAN continued with the process and invited bids for the construction of the airport under an EPC plus financing (EPCF) model in February 2012, setting a very short deadline for the bidders. However, CIAA continued to intervene, delaying the process twice. CAAN's tender evaluation committee finally opened the financial proposals for the project in July 2012. At the time, Nepal’s Minister for Tourism and Civil Aviation Post Bahadur Bogati said that China Eximbank had offered a concessional loan for the project, but with a condition that it should be constructed by a company ‘recommended’ by the lenders. Three Chinese companies submitted proposals following the government’s invitation for bids. The Government of Nepal had estimated the project to cost $180 million, but the lowest bidder (CAMC) quoted a price of $305 million. Two other Chinese firms, Sinohydro Corporation and China International Water and Electric Corporation, quoted $337.82 million and $349.28 million, respectively. The airport project ran into controversy again, given that the lowest bid for its construction was substantially higher than the government’s estimated cost. Opposition over the construction and bidding process mounted. During a press event, former Minister for Civil Aviation and Tourism, and leader of the Nepali Congress, Deep Kumar Upadhaya, claimed that selection of CAMC for construction of the project involved massive irregularities. Several other politicians also alleged irregularities in the selection of the Chinese company without transparent competition. As opposition mounted, the ruling Maoists organized a series of protests and demonstrations in Pokhara. In March 2014, the then Finance Minister, Ram Sharan Mahat said CAMC's bid of $305 million was ‘outrageous’ compared to another international airport being built with ADB funds—Gautam Buddha International Airport in Bhairahawa—and instructed the Civil Aviation Ministry to re-estimate the cost of building the airport. On April 7, 2014, at a CAAN board meeting chaired by Tourism Minister, Bhim Acharya approved the project with a revised cost of $215.96 million. The price tag had been recommended by a three-member independent panel formed by the government. Senior Government of Nepal officials that were involved in the negotiations said CAMC tried to convince them to accept the figure of $305 million, saying that the additional cost would be provided as a Chinese Government grant and that the Government of Nepal would incur no additional cost. CAMC later agreed to develop the airport at the Government of Nepal-estimated cost. Shortly thereafter, on May 22, 2014, CAAN and CAMC signed an RMB 1,541,017,825.57 ($244,040,450) commercial contract [No. 01/ATPDD/PRIA/2011/12] for the project. Approximately two years later, on March 21, 2016, the Government of Nepal signed two loan agreements worth RMB 1,378,740,000 ($212,916,857) for the Pokhara International Regional Airport Construction Project: a government concessional loan (GCL) agreement [CHINA EXIMBANK GCL NO. (2016) 5 TOTAL NO. (1524)] with China Eximbank worth RMB 1,022,810,000 and an interest-free loan agreement with China's Ministry of Commerce (MOFCOM) worth RMB 355,930,000. The loan from China Eximbank, which is captured via Project ID#38411, carries the following borrowing terms: a 2% interest rate, a 0% default (penalty) interest rate, a 20 year maturity, and a 7 year grace period. The loan from MOFCOM, which is captured via Project ID#71852, carries the following borrowing terms: a 0% interest rate, a 0% default (penalty) interest rate, a maturity of 20 years, and a grace period of 7 years. The Government of Nepal used the loan proceeds to on-lend to CAAN at a 5% interest rate (with a 20 year maturity and 7 year grace period) through a Subsidiary Loan Agreement (SLA) that was finalized on June 5, 2016. The ultimate borrower (CAAN) was expected to use the loan proceeds to partially finance the RMB 1,541,017,825.57 ($244,040,450) commercial contract that it signed with CAMC on May 22, 2014. Construction was delayed after China Eximbank set a condition that a joint escrow account should be set up into which CAAN — the project’s executing agency — would have to deposit the income generated from all of its airports. CAAN refused to do so, which delayed the release of the project funds, and construction of the airport stalled. However, CAAN and China Eximbank eventually agreed in 2017 to only deposit revenues generated by Pokhara International Regional Airport into the escrow account. According the Nepali Ministry of Finance's Aid Management Information System, the China Eximbank loan had achieved a disbursement rate of 53.2% ($113,457,998 of $212,916,857) as of June 30, 2021. Individual disbursements included an $18,528,896 disbursement on April 1, 2018, a $10,280,341 disbursement on August 10, 2018, a $3,461,066 disbursement on December 11, 2018, a $8,737,899 disbursement on January 24, 2019, a $6,968,642 disbursement on July 14, 2019, a $49,806,492 disbursement on June 30, 2020, and a $15,674,663 disbursement on June 30, 2021. The loan's amount outstanding was RMB 827,963,224 ($127,959,211) as of July 15, 2021. The Pokhara International Regional Airport Construction Project involved the construction of a 2,500 meter long and 45 meter wide airport that can accommodate medium category jets like the Boeing 757 and the Airbus 320. It also involved the construction of an apron, international and domestic terminal buildings, an air traffic control tower, a cargo terminal building along with an airport hangar. Upon completion, the project was expected to increase tourism in Pokhara, which is a scenic lake city in western Nepal and a major destinations for tourists. Once the international airport came into operation, tourists were expected to be able to fly directly to Pokhara. Prior to the implementation of the project, tourists had to first fly to Kathmandu and then take domestic flights or vehicles to travel to Pokhara. The project site is located in Chinnedanda, 3 km to the east of the existing domestic airport. CAMC was the EPC contractor responsible for project implementation. Under the EPC contract, a single contractor takes responsibility for all components like design, engineering, construction and procurement. The contract binds the contractor to deliver the project at the stipulated time and at a predetermined price, regardless of any possible cost overruns. A letter to proceed with construction was issued to CAMC on July 11, 2017. CAMC then began implementation at the project site on November 1, 2017. The Government of Nepal, CAAN, and China Eximbank signed an implementation agreement [No. 2017SSYD001] on February 25, 2018. The first loan disbursement took place on April 1, 2018. An official project completion ceremony took place on or around March 31, 2022. However, the project, which was originally expected to reach completion by July 10, 2021, faced various delays and challenges. Construction was delayed for months in early 2017 over an escrow account disagreement. China Eximbank insisted that an escrow account be opened into which CAAN would deposit the income generated from all its airports. However, the then Director General of CAAN, Sanjeev Gautam, refused to do so. After intense negotiations, China Eximbank issued a letter in April 2017, saying it had amended its earlier condition, allowing CAAN to deposit only those revenues generated by Pokhara International Airport into the escrow account. Gautam was later removed from office, and according to media reports, his ouster as CAAN Director General was a result of a ‘collusion’ between corrupt officials and business persons despite the risk of the government losing Rs. 6 billion over a dispute with an international contractor. Covid-19 disruptions also stalled the procurement of materials and prevented workers from getting to the construction site in 2020 and 2021. Then, an audit report published by the Office of the Auditor General pointed out that due to lack of ‘technical preparation for the commercial operation of the new airport, it looks like Pokhara international airport will not come into operation immediately, even after the construction is completed.’ The audit report also said that CAAN would incur financial losses as a result of the project. Then, in January 2023, Dhananjay Regmi, chief executive officer of the Nepal Tourism Board, said ‘[w]e have now experienced that a lavish inauguration ceremony does not guarantee the regular operation of an airport. We have to be careful to ensure that the new international airport in Pokhara will not share the same fate as the one in Bhairahawa.’ [Note: Gautam Buddha International Airport in Bhairahawa, was only able to attract one foreign airline—Jazeera Airways—after it opened in May 2022.] Ashok Pokharel, president of the Nepal Association of Tour Operators, also said that ’[t]he fanfare has ended at both airports now. The government needs to be serious about how to operate them, or the failure of these mega projects could deal a severe blow to the economy. […].' On January 1, 2023, Prime Minister Pushpa Kamal Dahal attended an official inauguration ceremony to mark Pokhara International Regional Airport being put into operation. The Chinese Embassy in Nepal, using social media channels, officially declared that the airport was a 'flagship project of China–Nepal BRI cooperation.'

Additional details

1. The Government of Nepal’s Aid Information Management System (AMIS) records a loan commitment value of $212,916,857 for this project. However, multiple sources indicate that two separate, RMB-denominated loans supported the project (which are together worth approximately $212,916,857). 2. The Chinese project title is 尼泊尔博卡拉国际机场项目. 3. One official source suggests that the face value of the GCL may have been downwardly revised to RMB 827,963,224.42 (see https://www.dropbox.com/s/2jgltrisjo9nfr1/PDMO_Annual_debt_Report_2077_1650957136.pdf?dl=0 and https://www.fcgo.gov.np/storage/uploads/publications/20220613173404_For%20Website.pdf). This issue warrants further investigation. 4. Standard Bank is the escrow agent. 5. The RMB 1,541,017,825.57 ($244,040,450) commercial contract [No. 01/ATPDD/PRIA/2011/12] that CAAN and CAMC signed on May 22, 2014 can be accessed in its entirety via https://www.dropbox.com/s/lwezvkbg4hl5zi9/contract%20agreement.pdf?dl=0 6. The March 21, 2016 interest-free loan agreement between MOFCOM and the Government of Nepal can be accessed in its entirety via https://www.dropbox.com/s/8i41zm1khsiqwdz/chinanepalagreement.pdf?dl=0. 7. A March 21, 2016 framework agreement that set the basic lending parameters for the MOFCOM loan and China Eximbank loan can be accessed in its entirety via https://www.dropbox.com/s/8i41zm1khsiqwdz/chinanepalagreement.pdf?dl=0. 8. The implementation agreement [No. 2017SSYD001] signed by Government of Nepal, CAAN, and China Eximbank on February 25, 2018 can be accessed in its entirety via https://www.dropbox.com/s/303us7b6cjw2o36/implementation%20agreement%20exim%20caan.pdf?dl=0.

Number of official sources

19

Number of total sources

59