As USAID pulls back from Pakistan, China steps up to the plate

When U.S. President Barack Obama unveils his fiscal 2016 foreign aid budget request next week, one of the big questions will be whether his administration stays the course in its massive reductions in development assistance to Afghanistan and Pakistan. Battered by allegations of corruption and mismanagement, the U.S. Agency for International Development’s programs in Afghanistan and Pakistan are two of the largest in its portfolio. By most accounts, the election of a new unity government in Kabul last year has revived some measure of confidence among U.S. officials that post-drawdown Afghanistan can still be regarded as a steady and reliable development partner. In the case of Pakistan, however, there are fewer palpable signs of optimism two years after the country held its own historic transfer of power. Early this month, the U.S. State Department denied reports that it had issued the anti-terrorism certifications for the Pakistani government, which are needed for the disbursal of a large chunk of fiscal 2014 assistance to Pakistan. “Pakistan still receives more assistance than most countries, a holdover from the days when Washington mistakenly thought it might be a real partner. But the levels are declining and should continue to do so,” reads a Jan. 9 editorial from The New York Times that echoes much of the confidential wisdom in Washington. Yet even as the United States seems poised to pull back even further from its aid engagement in Pakistan, another of the country’s long-standing strategic allies is quickly and decisively filling the gap. Devex analysis of Pakistani budget estimates finds that Chinese foreign aid to Pakistan has increased more than eightfold over the past five years — from $169 million in 2010-11 to $1.4 billion in 2014-15. It’s worth noting that China recently gave the green light to a $1 billion budget support package for Pakistan’s cash-strapped government, a commitment which accounts for much of the spike in Chinese aid to Pakistan. Known for its noninterference approach to development cooperation, China has now surpassed the United States to become Pakistan’s largest bilateral donor — arguably a symbolic marker of Beijing’s ambitions to deepen its sphere of influence in South Asia. Beijing’s aid spending in Pakistan in the current fiscal year is approaching three times the U.S. aid budget for Pakistan; only five years ago, the Chinese were outspent by the Americans 7 to 1. Two of Pakistan’s neighbors in the region, Sri Lanka and Nepal, have also seen a surge in Chinese aid spending in recent years. According to the latest aid disbursement statistics from the Sri Lankan government, China is now also the largest bilateral donor to Sri Lanka. The Indian government, on the other hand, records no foreign assistance from China, which might be expected given New Delhi’s own emerging donor aspirations. Yet while Beijing and Washington are two of the largest and most influential aid players in Pakistan, several other major donors also provide significant support to the country. In fact, China is hardly the only donor to hike its aid spending in Pakistan — a roster that also includes the World Bank, the United Kingdom, the European Union and even Saudi Arabia. A disaster-prone, highly unstable country where as much as 60 percent of the population live below the poverty line, Pakistan ranks among the biggest recipients of official development assistance — 16th in the world in 2013. The latest survey of donor spending plans by the Development Assistance Committee of the Organization for Economic Cooperation and Development predicts that Pakistan could see aid increases of above 5 percent up to 2017, a trend that seems to be driven by a mix of strategic and humanitarian considerations on the part of donors. Below, Devex ranks the top aid donors to Pakistan for 2014 and examines key trends in their spending levels and priorities. World Bank In 2014, World Bank assistance to Pakistan stood at $2.1 billion, a sevenfold increase from 2010. Centered on economic governance, human development, infrastructure and conflict risk reduction, the bank’s assistance to Pakistan has averaged $1.3 billion over the past five years. Following its adoption last year of a new country partnership strategy, World Bank assistance to Pakistan is poised to rise even further. The new, five-year strategy allocates an indicative amount of $11 billion in assistance to Pakistan and also refocuses the bank’s portfolio on four new priorities: energy, private sector development, inclusion and service delivery. The bank’s single-largest active project in Pakistan is the $600 million Power Sector Reform Development Policy Credit. Amid an improvement in Islamabad’s fiscal performance, the International Bank for Reconstruction and Development, the World Bank’s lending arm for middle-income and creditworthy poor countries, is likely to resume its lending to Pakistan at some point during the five-year strategy period, which ends in 2019. China As China ramps up its aid program in Pakistan, the most visible and widely scrutinized manifestation of that effort has been the billions in Chinese assistance for the development of Pakistan’s civilian nuclear sector — part and parcel of Islamabad’s strategy to alleviate its ongoing energy shortfall. Late in 2013, Pakistan broke ground on a Chinese-funded, $9.6 billion dollar nuclear complex in Karachi, expected to be the country’s largest such facility. Until the 9/11 attacks, the United States had withheld aid from Pakistan, prompted by U.S. concerns over its nuclear program, which linger on even until today. Proof positive of Beijing’s noninterference approach to development cooperation, China’s foray into Pakistan’s civilian nuclear sector — a no-go zone for U.S. aid — seems to be designed to sweeten the pot for Islamabad to embrace Beijing as its preferred development partner. In addition to its billions in investment into Pakistan’s civilian nuclear sector, China is also channeling significant support toward hard infrastructure projects — much like elsewhere in its aid portfolio. In the current fiscal year, China is expected to pump $89 million in assistance for a massive road project called the China-Pakistan Economic Corridor, as well as $54.3 million in assistance for the Neelum Jhelum Hydropower Project in northeast Pakistan, among other projects. Asian Development Bank Over the past five years, the Asian Development Bank’s lending to Pakistan has risen by 54 percent — from $904 million in 2010 to $1.4 billion in 2014. Since 2009, energy, infrastructure, financial sector reforms and urban services have been focus areas for ADB’s country partnership strategy for Pakistan. ADB’s board of directors is scheduled to consider a new country partnership strategy for 2015-2019 sometime in the first quarter of this year. The bank has already confirmed that the energy sector will receive the largest share (34 percent) of the bank’s portfolio through 2017. ADB is currently financing several large-scale energy projects in Pakistan, including the Jamshoro Power Generation Project and the Sustainable Energy Sector Reform Program. Islamic Development Bank A specialized institution of the Organization of the Islamic Conference, the Islamic Development Bank allocated at least $569 million in assistance to Pakistan in 2014-15, up 18 percent from 2010-11. IsDB’s 2012-2015 country partnership strategy for Pakistan spells out three sector priorities: infrastructure development, sustainable agriculture and rural development, and human development. Over the three-year strategy period, half of the bank’s financing envelope in Pakistan has been set aside for infrastructure development, including five hydropower projects in the north. In 2013, IsDB also approved a $251 million loan for Pakistan’s anti-polio program as part of its human development strategy in the country. United States In the early days of the Obama administration, passage of the Kerry-Lugar Berman Act – which pledged up to $1.5 billion annually in development aid to Pakistan from 2010 to 2014 – had been expected to revitalize U.S. development efforts in the country. Squeezed by budget pressures in Washington, however, the Obama administration met the KLB Act’s annual assistance target only once, in 2009-10. In the years since, U.S. aid spending in Pakistan has dropped by more than half — from $1.2 billion in 2010-11 to $546 million in 2014-15. USAID’s now diminished but still significant presence in Pakistan prioritizes assistance in five sectors: energy, economic growth and agriculture, stabilization, education, and maternal and child health. USAID Pakistan’s energy programs – which account for up to 30 percent of its budget – have focused on the renovation and rehabilitation of a string of hydroelectric and thermal power projects in the provinces of Khyber Pakhtunkhwa, Sindh and Punjab. Driven in large part by provisions in the KLB Act, USAID Pakistan has boosted its local spending share to more than 50 percent as of fiscal 2013 — well above USAID’s 30 percent local spending target for this year. At the same time, however, provisions in the recently expired KLB Act and follow-up legislation also began to impose more stringent conditions on U.S. assistance to Pakistan, including certification by the U.S. secretary of state that Islamabad is cooperating in U.S. counterterrorism efforts. Analysts say that the latter has fueled resentment in Islamabad, arguably helping pave the way for China and its noninterference aid strategy to gain traction. United Kingdom In its five years in office, the current U.K. government has hiked the U.K. Department for International Development’s Pakistan budget 44 percent to $468 million in 2014-15. Pakistan has become the biggest recipient of U.K. aid, a spot held by neighboring India until DfID, citing India’s middle-income status, began to wind down its program there. While Pakistan was also recently elevated to middle-income status, DfID has decided to stay the course in its Pakistan program, which has a heavy focus on the country’s education sector. The U.K. aid agency’s single-largest project in Pakistan is the $532 million Punjab Education Support Program II. At the urging of the House of Commons' International Development Committee, last year, the U.K. government also began providing technical assistance to its Pakistani counterpart to help boost its tax revenues. Japan Since hosting the Tokyo donor conference on Pakistan in 2009, Japan has allocated an average $289 million in foreign aid to Islamabad each year. Over the past five years, this figure peaked at $410 million in 2012-13. Japan’s 2012 country assistance policy for Pakistan spells out three strategic priorities for Japanese aid to the country: economic infrastructure, human security and social infrastructure, and balanced development for regions sharing the border with Afghanistan. The Japan International Cooperation Agency’s major active projects in Pakistan include the Sustainable Livestock Development Project for Rural Sindh Province and the Gujranwala City Waste Management Master Plan Project. Saudi Arabia In 2014-15, Saudi Arabia’s foreign aid to Pakistan is estimated to reach at least $168 million, a nearly sixfold jump from 2010-11. A long-standing ally of Saudi Arabia, Pakistan has received more aid from Riyadh than any non-Arab country, according to the Brookings Institution. The vast majority of Saudi aid to Pakistan is currently used to pay for the import of urea fertilizer from Saudi Arabia. It’s worth noting that in March 2014, Saudi Arabia reportedly issued a $1.5 billion loan to shore up Pakistan’s foreign reserves; the latest Pakistani government data provides no indication, however, that the loan has actually materialized. European Union The European Union’s foreign aid to Pakistan has more than doubled over the past five years — from $56 million in 2010 to $119 million in 2014. Through the next six years of the EU’s new multiannual indicative plan, EU aid to the country is slated to average $103 million annually. The MIP stipulates that rural development, education and good governance will remain focal sectors for EU aid to Pakistan. The rural development sector is slated to garner just above half of the MIP’s indicative allocations between 2014 and 2020. Early this month, EuropeAid issued a general procurement notice for technical assistance for Sindh province’s policy and budget framework. Check out more practical business and development advice online, and subscribe to Money Matters to receive the latest contract award and shortlist announcements, and procurement and fundraising news.