Pakistan and China are negotiating a $448 million loan to help finance the 969-megawatt Neelum Jhelum hydropower project, which has run into cash flow problems owing to bureaucratic delays. Those delays have caused the cost of the project to rise to Rs330 billion ($3.7 billion).
This revelation was made by Economic Affairs Secretary Wajid Rana at the signing ceremony of a subsidiary loan agreement between the economic affairs division of the finance ministry and the Neelum Jhelum Hydropower Project Company (NJHPC), a wholly owned subsidiary of the Water and Power Development Authority set up to manage the project.
“After a significant increase in the required foreign currency component to the build the project, Pakistan is negotiating with various stakeholders to meet the rising costs,” said Rana.
The agreement signed on Monday is a legal requirement for the $40 million loan that the project has obtained from the Kuwait Fund for Arab Economic Development. The loan was extended in November 2010 but had not been disbursed due to the government’s delay in signing the subsidiary agreement. Rana signed the agreement on behalf of the finance ministry and CEO Muhammad Zubair signed it on behalf of the NJHPC.
“The $40 million will partly resolve the cash flow problems of the Neelum-Jhelum project,” said Rana, adding that the required foreign funding for the project has increased to $1.8 billion from $ 1.1 billion.
The Neelum-Jhelum project is located near Muzaffarabad and is expected to generate 969 MW when completed. The major financiers of the project include the Kuwait Fund, the Export Import Bank of China, the government of the UAE and the Saudi Fund for Development.
The project had originally been budgeted to cost Rs130 billion, but the costs have since skyrocketed by 154% to Rs330 billion. In the revised plan submitted by the water and power ministry, the main reason for the spike in costs is attributed to a change in design, but a detailed examination of the figures shows that the primary cause for the increase was the delay in completion.
For instance, the government signed the loan agreement with Kuwait in 2010 but was unable to complete the formalities on it until early 2012 and ended up having to pay commitment charges owing to the delay. Officials at Wapda seemed to acknowledge this problem.
“The design change has increased the project cost by Rs17.6 billion, and in order to fast track the project, tunnel boring machines worth Rs8 billion were bought,” said Wapda Chairman Shakeel Durani. He explained that the design was changed after the 2005 earthquake. Under the original design, the Muzaffarabad faultline would have passed directly under the water storage area.
Both of these, however, account for only 12.8% of the increase in the project’s cost. About Rs30 billion was spent on interest paid during the construction period. Another Rs11 billion will be spent on the operations related to the tunnel boring machines. About Rs38 billion has been added to the cost to take into account the depreciation of the Pakistani rupee and another Rs38 billion due to ‘escalation’.
Durani claims that after adding all of these costs in, Wapda would be able to finish the project within the revised Rs330 billion price tag.
Zubair explained that, given the delays in the project, buying the tunnel boring machines was necessary. He claimed that about 30% of the work on the project had been completed and that it would meet its 2016 deadline. The government claims that unless it is able to achieve that deadline, Pakistan would lose water rights to India, which is also constructing the Kishanghanga dam.
The CEO claimed that the project would earn about Rs45 billion in revenues annually and would therefore be able to recover its cost of construction within seven years. He appeared to be unable to distinguish between revenues and profits and therefore was not taking into account the project’s operating costs.
Published in The Express Tribune, January 31st, 2012
COMMENTS (7)
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He appeared to be unable to distinguish between revenues and profits and therefore was not taking into account the project’s operating costs.
And ET needs to differentiate between profits and EBITDA.
@G. Din: Time to check his degree, PM Gillani already got one matric pass on top.
Is there anything else this Country knows to negociate for apart from LOANS??? Which incidently they will have difficulty in meeting payments for too !
"About Rs30 billion was spent on interest paid during the construction period." its like 10% of the total cost of the project already pocketed by the chinese and few others !!!! And we are negotiating more loans from the chinese knowing fully that we have to pay these back with interest and of course for the next 30-40 years of payback period, the dam, its resources, its management and decision making body will be under the control of the chinese directly or indirectly. Whats wrong with our country?
"He appeared to be unable to distinguish between revenues and profits and therefore was not taking into account the project’s operating costs." This is quite damning!