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October 22, 2018

A tale of two dams


October 22, 2018

Financing the Diamer Basha Dam and Mohmand Dam should never be seen as obstacles. We know that money is never the major constraint; poor resolve is what should be feared. In short then: what is most crucial is spawning ‘the idea’ and thereafter the ‘will to achieve’. These are the real challenges.

Admittedly, the combined cost of the Diamer Basha Dam and Mohmand dams is staggering. The Diamer Basha Dam would cost $14 billion over a construction period of 8-9 years while the Mohmand Dam would take six years at a cost of $3 billion. That is a grand total of Rs1800 billion. The Supreme Court initiated the process of mobilising the people of Pakistan and helped collect five billion rupees so far. However, finding resources should not be problematic.

I have no doubt that the government can conveniently raise the full amount through suppliers’ credit from equipment manufacturers; loans from civil works contractors; provincial governments’ equity ownership through their pension funds; long-term loans from domestic cement and steel manufacturers and credit from commercial and multilateral banks. It is also important that the state must fully develop these two projects since loans are available. The private sector should never be gifted annual profits of up to $400 million for the next thirty years for investing in power generation equipment as is being advocated by their proxies. The country has suffered enough through Independent Private Producers in the past. The national exchequer really needs these profits.

One promising source of funds would be inviting overseas Pakistanis to invest in the equity or loans of the dams where the permissible return would be around 10-15 percent. At present, the return on their bank investments is no more than two percent. Ethiopia raised good money for their Grand Renaissance Dam this way.

A fast-track approach needs to be adopted now and work on these two dams must start immediately as delay raises the costs appreciably. The cost of the Diamer Basha Dam was $8 billion ten years ago; since then it has risen by nearly $500 million annually. For the Mohmand Dam, the original investment cost was $1.2 billion which has more than doubled in eight years. Sins of omissions are always most damaging.

The land for the Diamer Basha Dam, valued at $1.1 billion, has already been acquired and paid for since 2011 by the Government of Pakistan. The civil works, including hydraulic gates, of the Diamer Basha Dam would cost $6 billion while the electro-mechanical equipment/switch yard would require approximately $4 billion. The federal government quite rightly plans to fund the civil works from the development budget which would amount to about Rs100 billion annually over six years. This would be about a sixth of the annual development budget with the balance, when required, shared by agencies like the Islamic Development Bank, bilateral lenders and the local banks. To this may be added another Rs25 billion annually for five years for the civil works of the Mohmand Dam.

The purchase of the electro-mechanical equipment, (turbines and generators), can be easily arranged as manufacturers in Europe and Japan have in the past always been providing the equipment through their banks suppliers’ credit. This was how Wapda’s thermal power plants were financed. The Diamer Basha Dam’s financial Internal Rate of Return is around 12 percent while Libor credit is available at eight percent or lower. The net gain to Wapda is obvious.

In 2009, in Frankfurt and the following year in Vienna, Wapda’s senior management met with the top five equipment manufacturers of the world to persuade them to bid competitively for its major projects. These five equipment manufacturers, easily the best in the business in terms of the efficiency and longevity of their equipment, did raise two points that policymakers must note. First, their experience suggested that when they bid in Pakistan state agencies, to pre-empt audit and accountability issues, selected the low-quality cheapest bid. Second, when asked if they would finance the equipment’s cost they confidently replied in the affirmative saying ‘this was no issue at all’.

It needs to be emphasised though that while selecting equipment only the best quality should be preferred even if this is costlier initially as its life-cycle cost is always lower in the long run. We must understand that Pakistan is too poor to buy cheap. Our unhappy experience with the poor quality equipment in Khan Khwar and Jinnah hydro-power projects should not be repeated. Similarly, note the forced outage in Mangla’s two low-quality communist-era Czechoslovak units of nearly five percent compared to the Western/Japanese equipment forced outage of about half a percentage point. The latter was five times better, despite its higher initial cost.

The other costs relating to interest-during-construction, supervisory consultancy, overheads charges and insurance could be sought from the sources mentioned above; and customs duties should be deferred.

More importantly, if the government wishes to finance and complete the Diamer Basha Dam and the Mohmand Dam expeditiously it must place the run-of-river Dasu hydel dam project on the backburner. Dasu is a low-priority project as our installed/under-implementation power capacity is enough for the next six years. It stores no water and is proposed to be built in phases from the profits it would generate itself during the next two decades. Five years back, Pakistan accepted the World Bank’s loan offer of $600 million for part cost of Dasu – though it was clear the amount was actually accepted to shore up by the foreign exchange reserves. (This amount should now be transferred to the Mohmand dam).

The rest of the project money for Dasu, was to be raised from our own resources and loan guarantees. It appeared that the World Bank was hesitant towards funding the Diamer Basha Dam because India was hostile to it. Way back in 2009, Isobel Guerrero, then vice-president of the Bank, told me plainly after a presentation that they would not support the Diamer Basha Dam. (Four of the five officials present on the World Bank panel were of Indian origin).

Also it should be borne in mind that the fragile and landslide-prone two-lane Karakoram Highway will not be able to carry the massive construction materials of two major dams on the Indus while simultaneously conveying civil supplies for the people of Gilgit-Baltistan and for the armed forces.

One last suggestion: a debate has surfaced lately, which was discussed earlier and shelved, on whether a Roller Compact Concrete (RCC) or a Rock Filled dam would be safer, cheaper and quicker to build. A panel of experts under the minister in the Planning Commission should hear both sides within three months and take a final decision. Some experts also feel that the height of the dam could be lowered for safety reasons.

In perspective then, time is of the essence. Way back in July 2010, following a presentation made to the Council of Common Interest by Wapda, all four chief ministers unanimously approved the Diamer Basha Dam within an hour. Sadly, eight years have since passed but the construction work has not started.

The writer has served as the chief secretary of GB, AJK, KP and Sindh and was the chairman of Wapda and the Pakistan Railways.

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