Lenders from the Middle East have stopped a planned loan of $433 million to fund the strategically important 969-megawatt Neelum-Jhelum hydropower project following the surge in cost estimate to $4.21 billion.
During the previous government of Pakistan Peoples Party (PPP), the project cost had jumped to $2.74 billion from $1.8 billion and during the rule of the present government, the cost estimate has gone up to $4.21 billion.
Pakistan had kicked off work on the Neelum-Jhelum River in Azad Jammu and Kashmir to secure water supplies but India also developed the Kishanganga hydroelectric power project on the river, which led to a legal battle between the two countries in the International Court of Arbitration.
The disclosure about the loan being denied by the Middle East lenders was made to Prime Minister Nawaz Sharif in a meeting of the Cabinet Committee on Energy on June 18.
Earlier, the project had to be finished by October 2015, but the deadline has now been revised to November 30, 2016. Financial close of the project has not yet been achieved.
Financing was expected to be received from a consortium of financiers but without any firm commitment. Now the prime minister has been told that the project will not be completed even in 2016 and work may be extended to 2017.
According to officials familiar with the development, the soaring cost of the project is a major concern for the Gulf lenders including the Islamic Development Bank (IDB), Kuwait Fund for Development, Saudi Fund for Development and Opec Development Fund.
They had committed an amount of $692 million, of which $259.5 million had so far been disbursed.
“The release of the remaining $433 million has been stopped by the lenders as they are demanding performance guarantees from the contractors for the additional work (variation orders) and cost escalation,” an official told the meeting.
Clause 10 of the contract calls for providing 10% performance security and clause 60.02 envisages no payment unless the 10% security is paid.
The financiers were of the view that clause 10 also applied to the variation orders and cost escalation and the contractors should provide additional performance security.
The project management, however, believes that the performance security should be paid in line with the cost indicated in the letter of acceptance.
The meeting was informed that the lenders had also termed the demand of additional security as “extra-contractual”. The project management was asked about the cushion it had to cover any default by the contractors and was told that clause 60.2 and standard contractual practices covered this risk of default in terms of 10% performance security against the total project cost.
In the case of default, the liquidity damage clause is invoked which primarily banks on the performance security. The project management expressed its apprehension that the additional performance security might put the project at risk and discourage the contractors.
Published in The Express Tribune, July 2nd, 2015.