ISLAMABAD, Feb 4: Pakistan is expected to finalise by early next month a $1.4 billion financing arrangement with China and Qatar to start construction of a much-delayed 969MW Neelum-Jhelum Hydropower Project in Azad Kashmir.

A project of Water and Power Development Authority (Wapda), the project has been in doldrums for six years and is considered crucial to secure Pakistan's priority rights over Neelum waters - a tributary of the river Jhelum - threatened by the Indian move to use its waters for power generation and diversion.

Prime Minister Shaukat Aziz told Dawn that his government had decided to construct the project in the public sector and he had issued instructions last week to make financing arrangements. "I have set a deadline of six weeks to finalise everything", he said.

His advisor on Finance Dr Salman Shah said that the government of Qatar had committed to invest $2-2.5 billion in Pakistan and there was an option to include Neelum-Jhelum project in their investment programme. "They can finance construction of the project". Secondly, the company selected by Wapda has also provided the option of financing the project through the Bank of China on buyer's credit.

Responding to a question if a financing offer for the project from the US-based YRM could also become part of the overall foreign funding, Mr Shah said the government of Pakistan could not confirm credibility and funding viability of the US firm. Also, credible sources like the Bank of China and Qatar government were better options. "We will finalise funding arrangement within four-weeks", he told Dawn on Sunday.

Responding to another question if the government would also issue bonds to raise funds for the project, he said if the financing programme (from the

China and Qatar) comes with the contract then there will be no need for bonds. However, there may be a need for bonds at a later stage if the project specific company was to be set up to run it.

An official at the private power and infrastructure board (PPIB) said the PM’s advisor on Finance would be holding a meeting of all the stakeholders in a couple of days to examine all options in detail. He said a $300 million credit line from the Bank of China has been lying unutilised for quite sometime and could also be considered for the same project.

The bidding for the construction of the project had been held seven months ago. Since then, the government has been contemplating arranging one billion dollars foreign exchange following Wapda's inability 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 (EPC) contract for the construction of $1.4 billion project. The project has already been delayed by more than six years due to lack of public-sector allocations for the project. Several rounds of bidding have been held and cancelled for one reason or the other.

The project should have been started in 1999 as originally planned. It is estimated to take at least seven years for completion. Currently, officials of the Finance and Economic Affairs Division are evaluating terms and conditions of the Chinese and Qatari financing.

The mode of foreign financing was earlier changed by the government from supplier's credit to buyer's credit which would mean that Pakistan's sovereign guarantees would be provided for the loan. The supplier's credit project-financing is usually based on the credit guaranteed by the export credit guarantee agency of the offering country while buyer's credit project-financing by a sovereign guarantee issued by the recipient country.

A few months ago, Wapda received three bids for the construction of the project. The lowest $1.3 billion bid from a consortium of China Gezhouba Group of China and the CMEC China was recommended by Wapda to the federal government for approval.

The bid from a consortium of Vinci of France and the Frontier Works Organisation (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.

Pakistan had stopped India about a year ago from completing a 22km tunnel that sought to construct a storage-cum-power project and divert Kishanganga (Neelum) waters to Wullar Lake in violation of the Indus Waters Treaty 1960. Later, India offered to alter its project design but Pakistan rejected that plan as well. Like the Chenab, Jhelum River of which Neelum is an integral part belongs to Pakistan under the 1960 treaty. Under the treaty, India cannot divert waters from Jhelum and Chenab rivers.

Under the treaty India could not change the flow of Jhelum River even for power generation that may affect any Pakistani power project. But if Islamabad fails to construct the project and there is no power project in Pakistan that could be affected on that particular river, India could divert the river for run-of-the river project but without any storage.

Under the treaty, Pakistan has exclusive rights to use water of western rivers - Indus, Jhelum and Chenab - while eastern rivers - Ravi, Sutlej and Beas - have been assigned to India.