In his budget speech, the Minister of State for Finance Mr Omar Ayub Khan said: "Today, I hereby announce the construction of Neelum-Jhelum Project, which will cost Rs84.50 billion.”

Unfortunately, the minister’s statement is not supported by ground realities, as the award for project contract as well as foreign exchange funding have not yet been finalised. The strategically vital Neelum-Jhelum hydropower project is not yet in a take-off position.

The Chinese consortium selected for the award of contract has failed to arrange required foreign exchange cost of the project. The government has not been able to line up financial resources for Wapda to meet the local currency cost.

While allocations for the project under the Public Sector Development Programme (PSDP) were Rs4 billion in 2005-06 and Rs6 billion in 2006-07, only Rs2.50 billion could be made available to Wapda and that too through re-appropriation of other allocations. Wapda spent Rs184 million on preparatory work undertaken as on June 30 2005.

The Neelum-Jhelum project has been allocated Rs10 billion for the next year. There is, however, no likelihood of requisite funds being released in near future, as the PSDP allocation of Rs62 billion of the last quarter 2006-07 has been withheld due to paucity of funds.

The 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 km south -- 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.

The Executive Committee of the National Economic Council (ECNEC) 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 bids for completing the project on a turnkey basis.

The consortium of China National Machinery & Equipment Import & Export Corporation (CMEC) and China Gezhouba (Group) Co. Ltd (CGGC) emerged as the lowest bidder at $1.30 billion. Instead of offering supplier's credit as per tender conditions, the bidder proposed buyer's credit amounting to $800 million covering foreign exchange cost against government's sovereign guarantee. The other bidder, China International Water & Electric Corporation (CWE), quoted $1.80 billion having offered similar conditions for financing.

Wapda has considered the lowest offer acceptable, and the government 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. There is no further development though Wapda is keen to conclude the deal with the lowest Chinese bidder.

Meanwhile, the government is making hectic efforts to arrange for foreign assistance through other sources. Initially there was 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.

PC-1 of the project, as approved in February 2002, estimates total cost of the project at Rs84,503 million with a foreign exchange component of Rs46,668 million ($777.80 million). The civil works account for over 86 per cent of the project cost, whereas the balance 14 per cent 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 as provided by 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 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.

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 per cent of the construction of the tunnel work has been completed. Last week Pakistan reiterated its stand on India's plans.

This development has resulted in conflict of interest between India and Pakistan and the matter may eventually be referred to a neutral expert (as in the case of the Baglihar Dam project), jeopardizing the project. The government is alive to the situation, taking up the matter of violation of the Treaty with the Indian authorities, but without any positive results. 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 be reduced by 30 per cent in the Neelum River - that would adversely affect the viability of the project too.

The current power shortage is restricting Pakistan's development and progress as the demand for electricity is increasing exponentially.

There will be a definite shortfall, particularly in hydro power generation, which is expected to add 1,260 MW by 2009-10.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 Wapda’s on-going hydroelectric power schemes. Thus, the power deficit in 2009-10 will put more demand on electricity in coming years.

More emphasis needs to be on hydro 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 hydro 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 LOC, major international engineering, procurement and construction (EPC) 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.

Second, for same reason, it has been difficult to get support 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. Almost 98 per cent 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.

There are a number of other special features of the project that makes it attractive for investment. Jhelum River and its tributaries are 'early risers' as compared to Indus. 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 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 Rs11 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. There is no other option with the government, at this belated stage, but to salvage the project through total financing at its own.

Minister for Water and Power Liaqat Jatoi promised stated in February 2006 that if foreign funding would not be available the government would construct the project at its own.

Alternatively, it shall be prudent for the government to consider private sector investment in the project.