China Eximbank provides $448 million buyer’s credit loan for 969MW Neelum-Jhelum Hydroelectric Project (Linked to Record ID#54087)

Project narrative

On May 22, 2013, China Eximbank and the Government of Pakistan signed a $448 million buyer’s credit loan (BCL) agreement [ID# CN-BCL-2013-01 and 2012211330] for the 969MW Neelum-Jhelum Hydropower Project (captured via Record ID#35266). The borrowing terms of the 2013 BCL were as follows: a 20 year maturity, a 8 year grace period, an interest rate of 6-month LIBOR plus a 2.8% margin, a 0.75% management fee, and a 0.5% commitment fee. Then, on September 29, 2016, China Eximbank and the Government of Pakistan signed a second BCL agreement [ID# 2016211190] worth $576 million for the 969MW Neelum-Jhelum Hydropower Project (captured via Record ID#54087). The borrowing terms of the 2016 BCL were as follows: a 20 year maturity, a 8 year grace period, an interest rate of 6-month LIBOR plus a 2.8% margin, a 0.75% management fee, and a 0.5% commitment fee. Both BCLs were to be repaid and secured with cash (from surcharges on electricity) deposited in an escrow account known as the Neelum-Jhelum Hydro Power Development Fund. As of December 28, 2018, the cash balance of the escrow account was approximately $10,760,508 (PKR 1.49 billion). The Government of Pakistan on-lent the proceeds of the BCLs (at a 12% interest rate) to Neelum Jhelum Hydropower Company (Pvt) Ltd (NJHPC), which is a project company and wholly-owned subsidiary of Pakistan Water and Power Development Authority (WAPDA) that was created to design, construct, own, operate and maintain the Neelum Jhelum Hydropower Project. As of June 30 2017, the $576 million BCL had fully disbursed and the $448 million BCL had achieved a 42.6% disbursement rate ($191.067 million out of $448 million). According to a March 2018 tariff petition that NJHPC submitted to Pakistan’s National Electric Power Regulatory Authority (NEPRA), the total project cost of 506,579 million Pakistani rupees (PKR) was to be financed according to a debt-equity-grant ratio of 79:9:11. The total amount of debt financing amounted to PKR 401,416 million, which is roughly equivalent to $3.823 billion. Additional foreign sources of debt financing included $358 million from the Islamic Development Bank, $181 million from the Saudi Fund for Development, $81 million from the OPEC Fund for International Development, and $74 million from the Kuwait Fund for Arabic Economic Development. The 969MW Neelum-Jhelum Hydropower Project is a run-of-the-river project in the State of Azad Jammu and Kashmir. The power plant has four power generation units and it was designed to divert the water from river Neelum through a tunnel. The tunnel intake is at Nauseri, 41 km northeast of Muzaffarabad and the underground powerhouse was constructed at Chatter Kalas, 22 km south of Muzaffarabad. The diverted water will produce electric power by passing through the turbines and thereafter this water will be released back into the River Jhelum, about 4 km south of ChatterKalas. Upon completion, the project was expected to produce 5.15 billion units of electricity annually. The EPC contractor for this project was a Chinese consortium known as CGGC-CMEC that consisted of China Gezhouba Group Co., Ltd. (CGGC) and China National Machinery Import and Export Corporation (CMEC). In January 2008, a letter of commencement was issued to the EPC contractor. The implementation of the project began on February 9, 2008 and construction activities were originally expected to reach completion by October 2016. According to WAPDA, 90% of the construction works were completed by March 2018. The project was officially completed on April 13, 2018. The Neelum-Jhelum power plant delivered 590 gigawatt-hours (GWh) of electricity from unit three on July 4, 2018, 453 GWh from unit four on October 4, 2018, 331 GWh from unit two on August 27, 2018 and 314 GWh from unit one on December 28, 2018. The project was originally expected to achieve its commercial operations date (COD) by December 2018. However, it is unclear if the project achieved this goal. As of February 2021, Pakistan’s Ministry of Water Resources had still not officially communicated the final COD to the Power Division. By April 11, 2019, the project had injected 2,400 GWh of energy into the national grid. This project was plagued by controversy. In a performance audit of the project that Pakistan’s Auditor General (AG) submitted to the parliament in February 2019, the AG concluded that ‘NJHP is an exemplary mismanaged project resulting into heavy cost and time overrun.’ The audit reported an ‘unjustified abnormal cost overrun of [PKR 389 billion]’ and losses due to non-achievement of envisaged financial benefits of PKR 237 billion. It also reported losses of PKR 30 billion of revenue and an unjustified claim of PKR 175 million rock burst and an unjustified and uneconomical deployment of tunnel boring machine that failed to achieve envisaged benefits of PKR 23.15 billion. The audit also pointed to the irregular and unjustified award of construction of contract of PKR 90.90 billion before the appointment of consultants and non-obtaining of performance guarantees worth PKR 48.8 billion resulting into suspension of foreign loans and delay in the project. Also, the AG highlighted poor performance of consultants for the project engaged at the cost of PKR 16 billion and non-recovery of PKR 9.90 billion as liquidity damages from the contractors. Other problems identified by the audit include non-achievement of financial close till the project completion, delays in land acquisition, delays in adequate power supply, frequent major design changes, non-finalization of detailed engineering design, and frequent issuance of variation orders. Transparency International Pakistan also alleged that the procurement of tunnel-boring machines (TBM), which were meant to speed up the excavation of the remaining tunnels, resulted in $74 million in kickbacks. Then, in November 2019, NJHPC CEO Mohammad Zareen testified before Pakistan's National Assembly Standing Committee on Planning and Development and noted that '[i]f revenue from the Central Power Purchase Agency (CPPA) does not commence by December 2019, the NJHPC/Wapda/GoP shall go into default due to back-to-back guarantee, apart from the NJHPC not meeting the routine maintenance expense.' Mohammad Zareen also testified that CGGC-CMEC abandoned the project after it had achieved a 99.6% completion rate and after shelling by the Indian Army at the dam site in July 2019 and October 2019. He said the Chinese contractor was not willing to return. Mohammad Zareen said the company’s annual debt service liability amounted to Rs 50 billion and it was getting regular letters from the Economic Affairs Division (EAD) every month for the servicing of debt to external lenders. 'I will not have the funds to pay even for salaries after December [2019]', he said, adding that the Rs 100 billion raised from local banks was currently being utilized for debt servicing and salaries. He also noted that Central Power Purchase Agency (CPPA) CPPA had not signed a power purchase agreement (PPA) with NJHPC: 'The PPA between the CPPA-G and the NJHPC, drafted and cleared by the legal section of the CPPA in June 2019, was submitted to the CPPA in July 2019 for approval of invoicing of payment of energy delivered, but is not being approved.' Consequently, NJHPC was not paid for energy delivered through the end of 2019. The non-signing of the PPA between the CPPA and NJHPC resulted in a circular debt build-up of about Rs 75 billion. On July 4, 2022, when the power plant was running at its full capacity (969MW), an abnormal increase in water leakage was observed which was controlled through continuous drainage pumps and an investigation into the excessive leakage was started. On July 5, 2022, an emergency meeting was held between the project management and the project consultants team to analyze the situation and determine the root cause of excessive water leakage. It was observed that tailrace tunnel had obtained an abnormal pressure of 616m instead of the normal 600m. It was also pointed out by the project consultants that abnormal pressure of 616m in the TRT (tailrace tunnel) had been recorded which otherwise remained below 600 meter. Accordingly, to ascertain behaviour of TRT, one unit was shut down which resulted in decrease in pressure to 608m. The consultants recommended that TRT pressure should be below 604m. In this way, load was reduced gradually. Then, on July 6, 2022, it was determined that the abnormal increase in pressure and water leakages/seepage was due to blockage in TRT and considering the safety of the structure and all other equipment, the power house was shut down. Soon afterwards and after necessary preparation (lowering of bulkhead gates by Mobile Crane, functional check of dewatering pumps etc.), dewatering was started on July 10, 2022. After completion of dewatering up to the main collapse point (293m), an inspection of the tunnel was carried out. According to the findings of a report, 'It was found that tunnel is fully blocked in 42m portion (between 251m and 293m) besides other damages.' Upon submission of the report to the Prime Minister's Office, a meeting was held on July 13., 2022 in which the Prime Minister instructed the government to engage a foreign consulting firm for determine the causes of the defect and seek advice on the remedial works. A detailed ToR for consulting firms was issued by the Prime Minister's Office, which was later finalized by the inter-ministerial committee at a meeting held on July 26, 2022. Immediately after the incident, CGGC was engaged for carrying out repairs. The contractor started mobilization at the site and subsequently a contract agreement was signed with the firm on August 25, 2022. Work on the restoration of plant commenced shortly thereafter. However, in September 2022, Chinese engineers and staff reportedly abandoned the repair of the 969 MW Neelum-Jhelum hydropower facility, which faced issues related to substantial cracks in a tunnel, resulting in a shutdown of the power plant coinciding with a power crisis in the country. The Chinese workers were reportedly facing security issues with local residents. The Government of Pakistan, at the time, rejected claims that work has stopped at the project site.