Marks third major funding round to anchor crucial initiative amid delays
Shahbaz Rana
April 14, 2024
The World Bank will provide a $1 billion loan for the 2,160 megawatts Dasu hydropower project—a crucial initiative aimed at integrating cheaper electricity into Pakistan's energy mix and showcasing the nation's resilience against adversaries.
This marks the third major financing by the World Bank for the project, which has faced delays and endured at least two terrorist attacks targeting Chinese nationals involved in its construction.
Government sources disclosed that the Board of Directors of the Washington-based lender is set to approve the $1 billion loan package in June, slightly delayed from the tentative third-week-of-May timeline.
China Gezhouba Group Company (CGGC) serves as the contractor for the Dasu Hydropower Project, funded by the World Bank and a consortium of commercial banks. Last month, a terrorist attack claimed the lives of five Chinese nationals and one Pakistani—a second assault on Chinese workers at the project site.
In July 2021, ten Chinese nationals lost their lives, with 26 more injured in a suicide attack on a bus enroute to the Dasu Hydropower Project. Pakistan provided $11.6 million in compensation to the Chinese nationals affected by the terrorist incidents.
According to a World Bank project document, the lender will extend an additional $1 billion in loans through its International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA).
This constitutes the third major financing by the lender for the project, which also secured $588.4 million for preparatory works and an additional $700 million for constructing the transmission line to transmit electricity from the project.
Over time, lending by the World Bank and the Asian Development Bank has shifted towards budget support loans, which are unproductive, adding to Pakistan's already unsustainable debt burden. The $1 billion project financing aims to partially rectify this imbalance.
Pakistan urgently requires cheaper electricity resources to reduce reliance on expensive imported fuel-based power generation. High electricity costs have prompted households, factories, mosques, and hospitals to turn to solar power generation, increasing the burden on those still connected to the national grid.
The World Bank now estimates the project's total cost at $4.9 billion, a 13% increase from previous estimates of $4.3 billion.
Pakistan had aimed to complete the project by December 2021 to add 2,160MW of electricity to the national grid in its initial phase. The Pakistan Muslim League-Nawaz (PML-N) government, in 2013, prioritised the Dasu hydropower project over the Diamer-Bhasha dam, and then Prime Minister Nawaz Sharif was eager to inaugurate its first phase before the end of his five-year term in 2018.
However, the project encountered numerous delays, poor planning, and mismanagement. The World Bank now estimates that the project will be completed by 2028—seven years past the original deadline.
The lender states that phase one of the Dasu project will annually save Pakistan an estimated $1.8 billion in hard currency by replacing imported fuels and offsetting 5 million tonnes of carbon dioxide (CO2). The project is vital for Pakistan to reduce its dependence on fossil fuels and achieve 60% renewable energy by 2031, it added.
Given Pakistan's current macroeconomic environment, the World Bank said Water and Power Development Authority (WAPDA) cannot mobilise international commercial financing. Therefore, the financing strategy recommends allocating additional funds to complete the project.
The additional $1 billion will comprise $435 million of IDA Short Maturity Loan, $365 million of regular IDA Scale-Up Window, and a $200 million IBRD loan component.
The World Bank said that the additional financing aims to ensure no disruptions in critical project components, facilitating the commissioning of DHP-I in 2028 and supporting the hydropower component for the first phase.
Pakistan's power sector grapples with challenges such as high electricity generation costs, over-reliance on fossil fuels, and fixed capacity payments.
The project documents have estimated the energy sector circular debt at $14.6 billion by June last year—far exceeding the construction cost of the Diamer Basha dam, while the power sector debt reached $8.3 billion, with an additional $6.3 billion in the gas sector.
The situation has worsened due to the addition of large coal and imported gas power plants with take-or-pay contracts over the past decade. These plants increased capacity payments by 50% and exposed the country to international fossil fuel price volatility.
The current average cost of electricity generation in Pakistan is US cents 8.5 per unit, driven up by the average cost of thermal generation exceeding US cents 10 per unit.
The lender said that the Dasu hydro power project will add electricity at the rate of 3 cents per unit, which will lower the average cost of generation in the country.
Pakistan Economic Forum
