Aug 06 - 12, 2007

Pakistan has reportedly awarded the contract for construction of Rs 90.9 billion Neelum-Jhelum Hydroelectric project in Azad Jammu and Kashmir to a consortium comprising China Gezhouba Group Company (CGGC) and China Machinery Export Corporation (CMEC). The strategically vital project has been in doldrums for six years. Islamabad considers it crucial to secure its priority rights over Neelum waters - a tributary of the river Jhelum threatened by the recent Indian move to use its waters for power generation and diversion.

China has once again acquired stake in another strategically important Neelum-Jhelum hydropower project in the south Asian country. In view of the looming energy crisis and growing economy, it is a high priority project for Pakistan. The project site near Muzaffarabad is blessed with abundant hydropower potential by virtue of its topography, meteorology and hydrology. The rivers Jhelum and Neelum along with their tributaries flow through Azad Jammu and Kashmir. They have immense hydropower potential in their laps. The main features of the project include construction of a dam on river Neelum, 47-km long diversion tunnel and installation of four turbines each with a generation capacity of 242 MW. The project will be implemented over a period of eight years and it would have the capacity of 970 MW. It would be capable to generate 5.15 billion units of electricity on its completion.

Last month, Islamabad announced the construction of Neelum-Jhelum Project in the new budget for the fiscal year 2007-08. An amount of Rs10 billion has been allocated for the project in the new fiscal year. While allocations for the project under the Public Sector Development Programme (PSDP) were Rs4 billion in 2005-06 and Rs6 billion in 2006-07, only Rs2.50 billion could be made available to Water and Power Development Authority (Wapda). The Wapda spent Rs184 million on preparatory work undertaken as on June 30 2005.

There is also a political aspect of the project, as it can protect Pakistan's priority rights over Neelum waters besides producing cheap electricity. It involves construction of a 47km tunnel under the bed of Jhelum River to divert Neelum River. India also plans to construct the Kishanganga ((Neelum) hydropower and water storage project on the same river upstream and Pakistan considers it a violation of the Indus Waters Treaty1960. If Pakistan does not make reasonable progress on the Neelum-Jhelum project, it will be obliged to allow India to continue with the Kishanganga project. Islamabad had stopped India about one and half year ago from completing a 22km tunnel that sought to construct a storage-cum-power project and divert Neelum waters to Wullar Lake in violation of the Indus Waters Treaty. Under the treaty, India cannot divert waters from Jhelum and Chenab rivers.

The strategically vital Neelum-Jhelum hydropower project could not come in a take-off position owing to the issue of foreign exchange funding. The project was delayed by more than six years due to lack of public-sector allocations for the project. In 2003, China had offered a handsome package involving around a billion dollars to construct Neelum-Jhelum project, envisaging the diversion of river Neelum at Noseri 41km upstream Muzaffarabad and out falling in Jhelum near Chatter Class 22km down stream of Muzaffarabad.

Wapda has been seeking about $600-800 million buyer's credit as part of the engineering, procurement and construction contract for the construction of the project. Pakistan has not been able to line up financial resources for Wapda to meet the local currency cost. Wapda has also been unable to secure the lowest bid with financing facility.

Several rounds of bidding have been held and cancelled for one reason or the other. In 2005, the government had re-advertised the project following a poor response to initial bidding, but results remained unchanged. The government had earlier refused to award the contract of the project to a Chinese firm in the aftermath of Oct 8 earthquake of 2005 because other bidders had refrained from competing citing presence of fault-lines in the area. For instance, A French contender, Vinci International, had backed out of the bidding process quoting 'structural disturbances' in the soil owing to the earthquake and called for re-survey and seismic investigation of the area.

Last April, the Wapda had cleared three international bidders for a contract to develop the Neelum-Jhelum Hydropower Project. The Chinese consortium of CMEC and CGGC emerged as the lowest bidder at $1.30 billion. The other bidder, China International Water & Electric Corporation (CWE), quoted $1.80 billion. Both the bidders proposed buyer's credit amounting to $800 million covering foreign exchange cost against government's sovereign guarantee, instead of offering supplier's credit as per tender conditions. Since then there has been no progress in this regard, as Chinese consortium could not provide confirmation letter from China Impex Bank. However, the lowest $1.3 billion bid from a consortium of China Gezhouba Group of China and the CMEC China was recommended by Wapda to the federal government for approval.

The bid from a consortium of Vinci of France and the Frontier Works Organization (FWO) that had offered to provide $800 million credit on soft terms was rejected on technical grounds because the FWO did not have relevant experience as lead contractor. The China International Water & Electric Corporation emerged as runner-up with a contract price of $1.8 billion to complete the project and also offered financing facility of $800 million but the bid money was too high.

Islamabad is currently evaluating terms and conditions of the Chinese financing.

The mode of foreign financing was earlier changed by the government from supplier's credit to buyer's credit which would mean that Pakistan's sovereign guarantees would be provided for the loan. The supplier's credit project-financing is usually based on the credit guaranteed by the export credit guarantee agency of the offering country while buyer's credit project-financing by a sovereign guarantee issued by the recipient country.

The Neelum-Jhelum hydropower project was scheduled to commence in July 2002 and to be completed in June 2010. The project has one of the most difficult designs, as it involves construction of a 47-km tunnel, passing underneath the bed of Jhelum River, to divert Neelum River. It is run-of-the-river type demanding relatively short gestation period, instead of a large multi-purpose storage project, like Tarbela dam in Pakistan, which also caters to irrigation, water supply and flood control.