Islamabad: Finance Minister Ishaq Dar rejected on Monday proposals for privatisation of the Neelum-Jhelum hydropower project to meet a financing gap caused by an escalation of its cost by 52 per cent.
Informed sources said the cost of the 969MW strategic project had risen to Rs418 billion from Rs274bn approved at the fag-end of the PPP government. A revised PC-1 finalised with fresh cost estimates is awaiting clearance by the Central Development Working Party and the Executive Committee of National Economic Council.
The finance minister presided over on Monday a meeting to review hydel projects in view of the June 18 directive of the prime minister to remove irritants in the flow of financing of the Neelum-Jhelum project that could add more than six per cent additional generation to the national grid by the end of next year.
The sources said arrangements had been finalised with the National Bank of Pakistan to lead a syndicate of banks for around Rs100bn Islamic Sukuk bonds to meet the local financing component with sovereign guarantee of the federal government. A term sheet with banks has already been approved.
They said the authorities were also in contact with China Exim Bank for a $576 million loan to meet the foreign exchange component. The loan is now in approval stage.
But there are some glitches in obtaining about $40m of foreign financing from Middle Eastern lenders and Islamic Development Bank. While the major part ($47m) of this head has been taken care of, the sources said, some technical issues relating to segments lacking government guarantee would need to be settled through top-level intervention.
They said that despite being a strategic project which was also meant to secure Pakistan’s water rights, Neelum Jhelum had been one of the unfortunate projects. It was launched a decade ago but is yet to complete its financial close – normally a perquisite for launching any project.
The sources said the Water and Power Development Authority (Wapda) had suggested two options to bridge the financing gap of over Rs160bn – inviting important investors to participate as financing partner or engage the Chinese contractor currently working on the Neelum-Jhelum project to become its strategic partner or rope in other Chinese investors.
The finance minister did not agree with the ideas because there would be many valuation issues relating to an ongoing project or unfinished asset. Also the process of engaging private investors or Chinese participation will require a minimum of six months.
The meeting was informed that at least four major cost components had not been made part of the overall project cost. These include interest during cost (IDC), annual contract escalation, foreign exchange price difference and taxes and duties. More than Rs100bn is needed to meet these requirements.
Mr Dar said the completion of hydropower projects was top priority of the government, adding that the cost of Neelum Jehlum project had increased because of delays in its execution, changes in the original design after the 2005 earthquake and the resultant escalation in the scope of work.
“It is our firm commitment that the project will now be taken up on a priority basis and all international donors and lenders will be re-engaged in the process of expediting release of funds for this project and for achieving this objective we will try to satisfy them on all their concerns,” he said.
Retired Gen Mohammad Zubair, CEO of the Neelum-Jhelum Power Project Company, told the meeting that 72 per cent physical work on the project had been completed.
The minister asked Wapda and the company to firm up their final cost estimates so that these could not be revised again and again.
Wapda Chairman Zafar Mahmood told the meeting that the board of directors of the project representing all ministries had approved the final cost estimate of Rs418bn and submitted the PC-1 to the Planning Commission for approval.
The project was originally estimated to cost Rs130bn in 2007 with a plan to generate half of the financing through Neelum-Jhelum Surcharge at a rate of 10 paisa per unit. But subsequent geological changes and project delays increased the cost to Rs274.9bn in 2012.
The project is important because it will ensure Pakistan’s rights over Jhelum river, partially lost to India due to Kishenganga hydropower project being built across the Line of Control.
After completion, the project is estimated to produce more than Rs45bn worth of “cheaper and cleaner” energy every year and contribute over Rs5bn annually to the Azad Kashmir government. It will also improve Wapda’s financial position and replace some of the expensive thermal projects being run on imported furnace oil.
The project located near Muzaffarabad in Azad Kashmir envisages diversion of water from the Neelum river through a 42km tunnel underneath the Jhelum river.
