South Asia

Is Pakistan Hurtling Towards a Debt Trap With a String of Hydropower Projects With China?

The deals aimed at stimulating the economy, utilising water resources efficiently and resolving the existing electricity shortage, could come at a heavy price for Pakistani taxpayers.

Pakistan has recently re-entered into some important hydropower project deals with Chinese companies.

Differences between Pakistan and China had erupted earlier over the Diamer Bhasha Dam (DBD) and Kohala. Now they have been re-negotiated. Owing to lack of transparency in the deal, it is not entirely known what prompted Pakistani leadership to re-enter into a deal with the same Chinese company; though it has been maintained that the new deals are on different terms and conditions.

On May 13, 2020, Pakistan signed a deal worth 442 billion Pakistani Rupees (USD 2.64 billion) with the Chinese state-run firm China Power for building the 272 meters high DBD. The total financial outlay of the DBD is PKR 1,406 .5 billion (USD 8.3 billion). This project is on the river Indus in Gilgit-Baltistan (GB) – which India claims is illegally occupied territory – and Khyber Pakhtunkhwa. It is likely to be completed by 2028.

Earlier, it was a part of the China Pakistan Economic Corridor (CPEC) project but the tough conditions, particularly regarding the transfer of ownership, were unacceptable and not “doable” for Pakistan. Afterwards, the Pakistani government tried to raise money for the DBD along with the Mohmand dam through crowdfunding. However, Pakistan then re-entered into a deal with the Chinese firm.

Under the new terms of the deal, China Power will hold 70% of the share while the remaining 30% will be with Frontier Works Organisation – a commercial arm of the Armed Forces of Pakistan. The DBD’s construction is expected to create about 16,500 jobs. Once in operation, it will irrigate around 1.23 million acres of agriculture land and generate 18.1 billion units of electricity annually.

Also read: As Pakistan’s Energy Crisis Worsens, Have Chinese Investments Failed Islamabad?

The second project the Chinese are constructing in Pakistan is at Kohala. It was listed under the China Pakistan Economic Corridor since August 2014. The Kohala project is on the Jhelum river on the Pakistani-administered side of Kashmir which India claims is illegally occupied territory since 1947-48. This 1,124-Megawatt project was to be developed by the Kohala Hydropower Company Private Limited. Disputes over this project took place in 2019 between Pakistan and China, which they tried to resolve but the Chinese firm refused to accept the dispute resolution plan approved by the government of Pakistan.

One of the major issues Pakistan had with the Chinese developer of the Kohala project was water flows and the release of water into the environment. This was resolved after the Economic Coordination Committee approved an additional release in Jhelum below Kohala dam. Another issue related to foreign exchange. Due to such reasons work obstacles were created over Kohala project.

On June 25, 2020, a “tripartite” agreement for implementing the Kohala project was signed between the China Three Gorges Corporation, the government of Pakistan-occupied Kashmir (PoK) and Private Power and Infrastructure Board. The project is likely to cost USD 2.4 billion. International Finance Corporation and Silk Road Fund are also sponsors of this project.

The third hydropower project agreed upon between Pakistan and China was in July 2020 and is at Azad Pattan. It is located on the River Jhelum near the village of Muslimabad in the district of Sudhnoti, in Pakistan-occupied Kashmir (PoK). This will be carried out by the Power Universal Company Limited which is owned and controlled by the China Gezhouba group.

The Indus at the site of the proposed Diamer-Basha dam. Photo: Water and Power Development Authority, Pakistan

Gezhouba has entered into a special purpose joint venture with a Pakistani renewable energy developer, Laraib group. Their joint venture is called as Azad Pattan Power Private Ltd Corporation, which will develop the project on the ‘build, own, operate, transfer’ (BOOT) model and transfer it to the government of Pakistan after 30 years. It is expected to be completed by 2026. Its capacity is around 700.7 MW and the total investment is around USD 1.5 billion.

Also read: The China-Pakistan Corridor is All About Power. Not Electricity, but the Real Thing.

For the government of Pakistan, both the Kohala and the Azad Pattan projects are likely to bring about USD 4 billion in the form of investments, produce around 1800 MW of hydel power and create 8,000 jobs.

However, projects such as DBD face opposition from people in Sindh and Gilgit Baltistan. A number of people in Sindh have questioned thee “feasibility, tenability and profitability of the dam”. In Gilgit Baltistan, it is believed that most of the infrastructural benefits have been reaped by Bhasha in Khyber Pakhtunkhwa, while the water runs through Diamer. India has also objected to the DBD stating that it is to be built in illegally occupied territory where Pakistan has no right to construction anything.

One of the major reasons Pakistan is entering into such a deal is to use the available water efficiently, as the country is experiencing water shortage and its yearly water availability is now less than 1000 cubic meters per person. Through dams, it is trying to manage its water resources, mainly for agricultural purpose on which the country’s economy depends.

Second, Pakistan faces a shortage of electricity. In 2019, the transmission and distribution capacity of Pakistan was stalled at approximately 22,000 MW while the maximum demand from the residential and industrial areas was about 25,000 MW. This implied a deficit of 3000 MW. Hydroelectricity will add to the total electricity generated and will help in reducing the supply-demand deficit.

While inaugurating the construction of the DBD, Pakistani Prime Minister Imran Khan vowed to build more dams which, he said, would reduce pressure on foreign exchange and allow Pakistan to generate its own fuel. Khan also said that hydroelectricity has dual benefits as the country “won’t have to import fuel and it won’t affect our climate negatively“. Third, as a debt-ridden country, Pakistan needs investments and aids to stimulate its economy and create jobs. Its erstwhile ally, the US is not likely to assist it and aid from West Asian countries have other limitations. Hence, Pakistan has drifted towards China’s orbit and is now highly dependant on it.

Also read: Is CPEC Good, Bad or a Disaster for Pakistan’s Economy and Environment?

In the long term, however, such investments in the hydro sector will increase Pakistan’s debt. According to 2019-20 Economic Survey of Pakistan, Pakistan’s total public debt increased by 7.6% in this fiscal year. Total public debt recorded at the end of March 2020 was 35, 207 billion (USD 21.03 billion)Pakistani Rupees. Different from the public debt is the money Pakistan has to pay on loan in the form of investments.

In 2017, China agreed to invest USD 50 billion in five Indus Cascade projects: Diamer-Bhasha; Thakot; Patan; Bunji; and Dasu. According to Hasan Abbas, the time taken for the five projects was likely to increase the cost to around USD 98 billion which  Pakistan has to borrow and pay the interest rate. Hasan, adds that the interest is likely to accumulate at the rate of almost USD 5 billion per year. This means, as Hasan estimates, that Pakistani taxpayers would end up in paying about USD 200 billion after 20 years. The DBD was excluded among the five projects, but the two countries have re-negotiated the deal. Additionally, the growing hydro debt will give the upper hand to the Chinese in Pakistan’s affairs.

Amit Ranjan is Research Fellow at the Institute of South Asian Studies, National University of Singapore. Views are personal.