Diamer Bhasha Dam Stuck in the Funding Trap

In mid-January 2015, the Asian Development Bank (ADB) asked for a four month extension to consider Pakistan’s long pending request for funding the Diamer Bhasha Dam (DBD). ADB’s deferment yet again is a serious setback to Pakistan’s relentless efforts to obtain funds for constructing the mega hydro-power project on River Indus. The ADB decision was announced after a meeting between Pakistan’s Finance Minister Ishaq Dar and the ADB Country Director Werner Liepach in Islamabad. This despite the fact that the ADB has agreed to support other energy, communications and infrastructure projects inside Pakistan. The DBD, with a projected capacity of 4500 MW, is slated to be one of the largest dams in the world. Conceived as part of the Wapda (Water and Power Development Authority) Water Vision 2025, the DBD project has faced unprecedented delay. The project site is located in Gilgit Baltistan, part of the erstwhile princely state of Jammu and Kashmir (J&K). Considering its size and design, the project necessitates external funding, especially in view of the dismal state of Pakistan’s economy.

Mounting frustration and an indefinite delay has pushed Pakistan to look for alternative sources of funding. Sometime in mid-2014, it was suggested that Pakistan would convert the project into a Public Private Partnership (PPP), based on which a DBD company would be formed. To realise this goal, a focussed marketing plan showcasing the project to potential international donor agencies was conceived. After coming to power, the PML-N (Pakistan Muslim League-Nawaz) dispensation under Prime Minister Nawaz Sharif renewed efforts to speed up the project and it was reported that Sharif would personally monitor its progress. Gaining funds for the DBD has been for long on the priority agenda of successive Pakistani governments. The governments headed by Musharraf and Zardari had also tried their best to realise this dream power project. But Pakistan’s comprehensive efforts to secure funding for the project have been meeting dead ends for more than a decade now.

The United States and China

Pakistan has taken up the issue with the United States (US) on several occasions including during the working group meetings under the US-Pakistan Strategic Dialogues. After several spells of negotiations, the US has been sending out mixed and rather confusing signals on the DBD, and has been largely non-committal. Though the US acknowledges Pakistan’s intensifying energy requirements and has offered limited assistance by funding the project’s preliminary assessment study, it has steered clear of making any significant financial commitment towards the DBD. Nevertheless, the government of Pakistan has doggedly pursued the US on this score. In the past, there have been reports that part of the development assistance under the Kerry Lugar Berman package could be legitimately diverted towards DBD. This has, however, not happened so far. Overall, the US has been reluctant to fund the project and has suggested that Pakistan focus on smaller projects. It has maintained that funding a huge project such as the DBD falls outside the US assistance paradigm. Notably, several IMF (International Monetary Fund) and World Bank meetings in Washington held over the last couple of years have served as fund raising exercises for Pakistan.

Amidst widespread conjectures that the project may be held up for an indefinite period owing to funding deficit, in July 2014, the US agreed to assist Pakistan in securing funds for the DBD. Subsequently, an investors’ meet with potential funders was held at Washington in October 2014. At this meeting, jointly organized by the USAID (United States Agency for International Development) and the US-Pakistan Business Council, US officials were seen convincing investors by projecting the DBD as Pakistan’s “smartest choice”.1

As for China, it is regarded as the only all-weather friend of Pakistan and it has committed a whopping $ 45 billion towards the CPEC (China Pakistan Economic Corridor). But the Chinese have been distinctly non-committal on the DBD. Given China’s risk-averse investment behaviour, it is unlikely that it would overstretch itself by putting a huge chunk of investment in a single project like the DBD. It is true that soon after the Washington conference, China Development Bank agreed to fund yet another investors’ conference for the DBD. Nothing significant has emerged from such conferences, however. Given China’s hesitation to fund some other hydro-electric projects, like the 969-megawatt Neelum-Jhelum project, so far it was considered unlikely that it would change its behaviour dramatically in the short or medium term. But the fact remains that both the US and China have now offered to help Pakistan raise funds from external sources to build the DBD.

International Financial Institutions (IFIs)

In May 2014, the World Bank unveiled the Country Partnership Strategy (CPS) under which it promised to funnel $11 billion for Pakistan’s public and private sector, although the DBD was not included in the strategy plan. The World Bank has been consistently disinclined to the idea of funding a dam located in a disputed region. Hence, it urged Pakistan to furnish a NOC (no objection certificate) from India, which claims Gilgit Baltistan as part of J&K. Interestingly, the World Bank has shown a clear preference for smaller upcoming projects such as the Dasu dam to be built in Khyber Pakhtunkhwa.

Similarly, the ADB’s positon on the DBD has been rather stringent. Initially, the bank set out preconditions and demanded surety on compensation and rehabilitation of the people affected or displaced. It also suggested that Pakistan should mobilise indigenous resources for the project. ADB was originally slated to provide the bulk of the funds and lead the funding consortium, but, as stated above, it has dragged its feet over the DBD.

Domestic pulls

The delay in the project has cost Pakistan heavily in terms of a steep hike in the estimated project cost. The revised estimate stands somewhere between $12 (2008) and 14 (2013) billion, while the initial estimate had stood at $ 8 billion. A peer reviewed study conducted by a group of Oxford researchers in 2014 termed the DBD a “non-starter”, raising pertinent questions on the cost effectiveness of the project.2 Wariness is apparent in official statements fed by growing energy woes and Pakistan’s desperate attempt to deal with the crisis. Days before the October 2014 Washington meet, the ECNEC (Executive Committee of the National Economic Council) expressed reservations on the escalating cost figures of the DBD, noting its inability to approve Rs 101 billion for land acquisition. Already bound by the tough entailing conditions of the IMF loan, Pakistan is hard selling the DBD project by underscoring its vitality to energy requirements and how, upon fruition, the project will render huge profits to all those who invest. Besides, stiff demands to revise the rates of compensation for land acquisitions have recently added to the government’s worries.

Assessment

Recent developments on the DBD further complicate funding issues for Pakistan. It remains to be seen how the Sharif government handles the current phase of the logjam. It is more or less clear that both the US and China will avoid getting directly involved in the project, even as they are willing to help Pakistan in urging other investors to fund the project. Pakistan is likely to market the DBD as a high yield project to potential investors. Against the backdrop of a grim internal security situation and an ailing economy, that may not be easy though to invoke confidence among investors. The Sharif government is fully conscious of the fact that giving up the DBD could cost not only in terms of adding to domestic discontent but also causing political and diplomatic discomfiture due to India’s oft-stated reservation against the DBD being built in a disputed region. The simultaneous shift of focus to smaller projects such as Dasu reflects Pakistan’s endeavour to come to terms with the harsh realities of funding deficit to get mega-projects like DBD going.

At the same time, Pakistan may continue to cast the net wider and try its best to rope in potential funders for the DBD project. Overall, however, the prospects appear bleak as evident in the updated DBD brochure on the Wapda website, in which the section on funding channels is relegated to the last page and ends inconclusively with expressions like the ADB has shown “interest”, USAID’s “encouraging” response and the pending request with the Friends of Democratic Pakistan (FoDP).3

Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India

• 1. Anwar Iqbal, “Diamer-Bhasha ‘smartest choice’ for Pakistan: US,” Dawn, October 9, 2014, at http://www.dawn.com/news/1136749.
• 2. Atif Ansar, Bent Flyvbjerg, Alexander Budzier, and Daniel Lunn, “Should We Build More Large Dams? The Actual Costs of Hydropower Megaproject Development,” Energy Policy, March 2014, at SSRN: http://ssrn.com/abstract=2406852, p. 13.
• 3. Diamer Bhasha Dam Project, at http://www.wapda.gov.pk/htmls/future-index.html (status updated up to August 31, 2014).