Neelum-Jhelum hydropower project

Minister of State for Finance Omar Ayub Khan, while delivering the 2007-08 Budget speech in the National Assembly, has proudly said, "Today, I hereby announce the construction of Neelum-Jhelum Project, which will cost Rs 84.50 billion.
The electricity generated from this unit will contribute to the development of the country." Unfortunately, the Minister's statement is not supported by ground realities, as the award of the contract for the project, as well as foreign exchange funding, have not yet been finalised.
In fact, the strategically vital Neelum-Jhelum hydropower project is not yet in a take-off position. It is reported that the Chinese consortium selected for the award of contract has failed to arrange requisite funds to cover foreign exchange component of project cost and therefore the contractor has not mobilised.
On the other hand, the government has not been able to line up financial resources for Pakistan Water and Power Development Authority (WAPDA) to meet the local currency component of the project cost.
Though allocations made for the project under the Public Sector Development Programme (PSDP) were to the size of Rs 4 billion in 2005-06 and Rs 6 billion in 2006-07, only Rs 2.50 billion could be made available to WAPDA for the project and that too through re-appropriation of other allocations. In comparison, WAPDA had incurred only a sum of Rs 184 million as on 30th June 2005 on the preparatory work undertaken for the project.
The government has announced development outlay of Rs 520 billion for the PSDP in the 2007-08 budget, the water and power sector receiving Rs 84.15 billion, mostly for the on-going schemes. Out of this, the Neelum-Jhelum project has been allocated Rs 10 billion.
There is, however, no likelihood of releasing the requisite funds in near future for the project, as reportedly, the government has already withheld huge sum of Rs 62 billion of the last quarter of the current fiscal year (2006-07) the PSDP allocations for various development projects, due to paucity of funds.
The Neelum-Jhelum hydropower project - with a total maximum capacity of 969 MW - is to be located in Muzaffarabad district, Azad Jammu and Kashmir (AJK). It envisages the diversion of River Neelum waters at Nouseri and outfalling in the Jhelum River near Chattar Kalas - at a distance of 22 kilometers south of the capital of the state - where the underground power station will be built as part of an integrated project.
Comprehensive feasibility studies, conducted in the 1980s and revised in the 90s, confirmed the economic and technical viability of the project, whereas detailed engineering design was completed in 1997. Executive Committee of the National Economic Council (ECNEC) has approved the revised scheme, in February 2002, as a high priority project.
Bidding process, though initiated in June 2002, had a number of rounds that remained inconclusive until recently, mainly due to bureaucratic snags and lack of planning. In response to the final tender issued in April 2006, the WAPDA received only two responsive bids for undertaking the project on a turnkey basis.
The consortium of China National Machinery and Equipment Import and Export Corporation (CMEC) and China Gezhouba (Group) Co Ltd (CGGC) emerged as the lowest bidder at USD 1.30 billion. Instead of offering supplier's credit as per the tender conditions, the bidder proposed buyer's credit amounting to USD 800 million covering foreign exchange component against government's sovereign guarantee.
The other bidder, China International Water and Electric Corporation (CWE), has quoted USD 1.80 billion having offered similar conditions for financing. WAPDA has considered the lowest offer acceptable, and the government also agreed to provide sovereign guarantee, as a very special case, for the repayment of the buyer's credit as demanded by the bidder. However, the Chinese consortium is said to have been unsuccessful in providing confirmation letter from China Impex Bank.
Meanwhile, the government is making hectic efforts to arrange for foreign assistance through other sources and initially there is positive response from Qatar, Kuwait and Saudi Arabia. But, in such a case, the procedural bottlenecks would not allow either of the two Chinese bidders to get the contract since basic parameters of the tender would change, once again.
For the reasons of transparency, this may also necessitate another round of bidding, which the government can ill-afford, given the circumstances and prevailing conditions. PC-1 of the project, as approved in February 2002, estimates total cost of the project as Rs 84,503 million with a foreign exchange component of Rs 46,668 million (USD 777.80 million).
The civil works account for over 86% of the project cost, whereas the balance 14% share is of electrical and mechanical works. There are already reports about escalation of the project cost since the PC-1 estimates were valid until the year 2002.
Strategically, the project is of great significance. On completion, the project will protect Pakistan's rights within the provisions of the Indus Waters Treaty. The project is located further downstream on the Neelum River, a tributary of the Jhelum River, which enters from the Indian held Kashmir where it is known as the Kishanganga River.
As per the provisions of the Indus Waters Treaty, if Pakistan manages to complete the Neelum-Jhelum project first, India would not have the right to divert the river flow, as it plans to do at present. Likewise, if India completes its project on the Kishanganga first, it would have priority rights on the use of Neelum/Kishanganga waters.
According to Article III of the Indus Waters Treaty (Provisions Regarding Western Rivers), "Pakistan shall receive for unrestricted use all those waters of the Western Rivers which India is under obligation to let flow under the provisions of Paragraph (2)". The referred paragraph says:" India shall be under an obligation to let flow all the waters of the Western Rivers, and shall not permit any interference with these waters, except for the following uses, restricted (except as provided in item (c) (ii) of paragraph 5 of Annex C) in the case of each of the rivers, The Indus, The Jhelum and The Chenab, to the drainage basin thereof: (a) domestic use; (b) non-consumptive use; (c) agriculture use as set out in Annex C, and (d) generation of hydropower, as set out in Annex D."
Annex D of the document specifies the parameters for generation of hydroelectric power by India in the Western Rivers, inter alia, stipulating in paragraph 15 (iii) the condition that "existing agriculture use or hydroelectric use by Pakistan would not be adversely affected."
In July 2002, Pakistan had refused to allow India to divert the waters of the Neelum River for power generation. Regardless, India has started construction on the Kishanganga hydropower project of 330 MW capacity, which was approved in June 2004, to be located near Bandipura in Baramula.
The project involves a 103-meter dam across the river before it crosses the Line of Control (LOC) and a channel along with a 27-km long tunnel to divert water from the river to the Wullar Lake. It is reported that 75% of the construction of the tunnel work has been completed. Last week the Government of Pakistan has reiterated its stand on India's plans.
This development has resulted in conflict between India and Pakistan and the matter may eventually be referred to a neutral expert (as in the case of the Baglihar Dam project), jeopardising the Neelum-Jhelum project that has yet to take off. The government is alive to the situation, taking up the matter of violation of the Treaty with the Indian authorities, but without any positive result so far. In the very real possibility that India completes its Kishanganga project first, Pakistan would not have the required flow at full capacity for its Neelum-Jhelum project - estimated to reduce by 30% in the Neelum River - that would adversely affect the viability of the project too.
The current power shortage in the country is restricting Pakistan's development and progress as the demand for electricity is increasing exponentially. Pakistan plans to increase its present installed power generation capacity by 143,000 MW in the next 25 years, in a phased manner, to reach cumulative capacity of 162,590 MW by the year 2030, with a view to sustain higher GDP growth rate at 7-8 per cent.
The capacity addition will thus include 8,400 MW nuclear power, 26,200 MW hydel power, 19,750 MW coal-based energy, 9,520 MW renewable energy, 1,360 MW oil-based energy and 77,820 MW gas-based power generation.
According to the National Energy Security Plan (2005-2030), total current installed capacity (of 20,289 MW) is planned to increase, in the first phase, to 27,389 MW by the year 2010. The target, however, seems to be difficult to achieve, given the conditions. Again, power projects committed for implementation by the Independent Power Producers (IPPs) are mostly thermal power plants based on oil and gas, impacting highly on cost of power generation, besides taxing on resources.
There will be a definite shortfall, therefore, particularly in hydel power generation, which is expected to add 1,260 MW by 2009-10. In reality there is only one project of 84 MW (New Bong hydropower project) in private sector that may come on stream by then, besides the completion of on-going hydroelectric power schemes of WAPDA.
Thus, the power deficit in 2009-10 will put more demand on electricity in coming years. More emphasis will be on hydel power generation with the objective of achieving sufficient and low-cost electricity, which has an identified potential of additional 40,000 MW. It is planned to increase present installed hydel generation capacity to 7,570 MW by 2015, in the second phase, and the Neelum-Jhelum hydropower is an important project of the Plan period.
The project inherits a number of constraints, impediments and challenges. Given the fact that the project is located on a long stretch of hilly terrain in the AJK and that the site is near the Line of Control (LOC), major international EPC (Engineering, Procurement and Construction) contractors, primarily from the Western sources, are not willing to engage in the project construction. This has been demonstrated in poor response to the project tenders issued by the WAPDA from time to time.
Secondly, for the same reason, it has been difficult to seek interest of international lending agencies to finance the project. Lastly, the project is large and of a complex nature, first of its kind in Pakistan considering the underground layout that has been adopted. Almost 98% of the project structure would be underground, including a 32-1/2 km long tunnel and the powerhouse. The tunnel will be constructed about 300 meters below the riverbed.
Nonetheless, besides being of strategic importance, there are a number of other special features of the project that makes it attractive for investment. The Jhelum River and its tributaries are 'early risers' as compared to Indus River. The project, on completion, will thus generate power even during March-June period, when other hydropower stations, like Tarbela, operate at minimum capacity due to limited availability of water.
The proposed power station will thus help to meet peak demand of electricity in the country during the summer season. The project is run-of-the-river type demanding relatively short gestation period, instead of a large multi-purpose storage project, like Tarbela and Mangla, which also cater to irrigation, water supply and flood control. The project is vital for the socio-economic uplift of the AJK area. The power station will be connected to the national grid through two 500-KV transmission lines of WAPDA system up to Rawat. This scheme was approved by the ECNEC in December 2005 at a total cost of over Rs 11 billion that WAPDA is implementing currently.
The Neelum-Jhelum hydropower project was scheduled to commence in July 2002 and to be completed in June 2010. It has already been delayed for almost five years, and the government can ill-afford any further delay in the project implementation. There is no other option with the government, at this belated stage, but to salvage the project of great national importance through total financing at its own.
Today, Pakistan has foreign exchange reserves to the record level of US $15.03 billion. In this need of hour the partial utilisation of these reserves for the implementation of the project is fully justified. Minister for Water and Power Liaquat Ali Jatoi has promised to the nation, in February 2006, that if foreign funding would not be available the government would construct the project at its own. Now is the time to fulfil the promise, lest it is too late.
Alternatively, it shall be prudent for the government to consider private sector investment in the Neelum-Jhelum project, pursuant to its policies to develop energy infrastructure with private sector participation. In fact Power Policy 2002 has identified this project to be implemented by the private sector, under the mid-term plan.
Later, it was decided to develop the project through WAPDA as one of the priority projects under Vision 2025. Power Policy 2002 already offers various financial and security incentives encouraging development of hydropower projects by the IPPs, and the response from private sector has been very positive. Consequently, the government needs to take major steps in this direction on priority basis.