Jan 21 - 27, 2008

The 969MW Neelum-Jhelum hydroelectric project in Azad Jammu and Kashmir was originally scheduled to commence in July 2002 and to be completed in June 2010. Unfortunately, the former government could not bring it in a take-off position owing to the issue of foreign exchange funding and the project remained in doldrums for six years. Had the project been launched in 2002, the country would have not faced the looming energy crisis at a time when its economy was growing at a rate of 7 percent. It should have been a high priority project for Pakistan. Last month, the chairman Water and Power Development Authority (Wapda) signed the contract, which has been awarded to a consortium comprising China Gezhouba Group Company (CGGC) and China Machinery Export Corporation (CMEC). The project will be executed by 2015 at accost of.US$1.5 billion.

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. 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.

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. Wapda has been seeking about $600-800 million buyer's credit as part of the engineering, procurement and construction of the project. 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.

In June last year, Islamabad announced the construction of Neelum-Jhelum project in the budget for the fiscal year 2007-08 and allocated an amount of Rs10 billion for the project. In August, Wapda set up the Neelum-Jhelum Hydroelectric Project Company (NJHPC) to rise about Rs50 billion for the project for protecting Pakistan's priority rights over the Neelum River. The NJHPC had been registered with the Securities and Exchange Commission of Pakistan as a special purpose vehicle (SPV) to raise about half of the project cost in foreign exchange through bonds and loans. Wapda and the federal government could not succeed in arranging foreign exchange component of the project cost and hence the new project company has been established for the purpose.

Pakistan will need to spend $87 million for the start-up operations in the first year of the project's implementation. On completion, the project will generate electricity at a cost of Rs1.91 per kilowatt hour (unit), which is significantly lower than the tariff currently being offered by the government for thermal power projects. 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 would be capable to generate 5.15 billion units of electricity on its completion.

Pakistan has already released Rs5 billion as mobilization advance to the executing agency to start the project without further delay.

According to the official sources, the estimated cost of the project on its completion was expected to increase by 41 per cent to $2.14 billion, although its contract had been awarded to the Chinese firm at $1.5 billion. The project will require $125 million in the second year of implementation, followed by another $235 million in the third year. In the fourth year, it will require $271 million and $382 million in the fifth year. In the sixth year, $444 million will be spent on the project and then about $348 million in the seventh year. In the final year of implementation, the project will require another $248 million, leading the total cost of the project to $2.14 billion.

In April 2006, the Wapda had cleared three international bidders for a contract to develop the 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 $1.30 billion bid from the Chinese consortium 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.

The project is also very important for the country from viewpoint of regional politics, as it can protect Pakistan's priority rights over Neelum waters besides producing cheap electricity. 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 Treaty of 1960. 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.

About two years back, Islamabad had stopped India 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. While the treaty gives exclusive rights to Pakistan to use water of western rivers Indus, Jhelum and Chenab, India has the same rights to use the water of eastern rivers - Ravi, Sutlej and Beas.