Funding dams

Public finance in countries like ours is strained. The governments rarely generate enough revenue to meet the growing needs of development and non-development expenditures. Therefore, optimised allocation of public resources will always remain a contentious public policy issue.

Strong democracies have nurtured institutional processes which prioritise inclusive and informed debate through their elected legislatures to address this issue. The same mechanism is encouraged to decide the fate of expansive public programmes or projects. Large-scale water reservoirs usually fall in this category and attract widespread concerns whenever proposed.

How the Pakistani government should address the legitimate socio-economic and technical concerns of the various federating units concerning dams merits a separate debate. Nonetheless, the federal government will be entrusted with defining the modes to fund hydropower projects — the failure of building them, it believes, would risk our existence.

So the federal government’s course of action will not only ascertain the likelihood of the successful completion of these projects, but may force it to prioritise public infrastructure. Apparently, this may require the PTI to subvert its ambitious plan of stimulating funds for the education and health sectors, as it criticised the PMLN for their alleged romance with highways and metros.

That was perhaps the backdrop which led Prime Minister Imran Khan appealing to the Pakistani Diaspora to contribute to the CJP-led dam fund. The job of the Finance Minister will be seemingly easier if the Diaspora donated the whopping 12 billion USD. But there is something inherently unpleasant about megaprojects: cost and scheduling overruns.

The PM would have seen the Sydney Opera House from his cricketing days. In 1957, it was estimated to be completed by 1963 at a cost of 7 million AUD, but was opened in 1973 after having cost more than 100 million AUD. According to Bent Flyvbjerg, a professor at Oxford University and a megaproject guru, cost overruns of up to 50% are common in nine out of ten megaprojects. More astonishingly, benefit shortfalls of up to 50% are common too. Factors such as geography and time make negligible difference.

Keeping aside the risk of cost escalation, if the PTI government can generate 12 billion USD through donations, this unprecedented achievement would leave the Scandinavians in envy — whose admiration is pronounced in nearly every speech by the PM. The prospects for such a leap-frog are illusive, unfortunately. Once the federal and provincial governments reach consensus on the construction of dams, the former ought to devise a strategy of blending public and private capital to meet the exorbitant financing needs.

The PM would have seen the Sydney Opera House from his cricketing days. In 1957, it was estimated to be completed by 1963 at a cost of 7 million AUD, but was opened in 1973 after having cost more than 100 million AUD. According to Bent Flyvbjerg, a professor at Oxford University and a megaproject guru, cost overruns of up to 50 percent are common in nine out of ten megaprojects

Ethiopia is approaching completion of the 6,000MW Grand Ethiopian Renaissance Dam (GERD). It became a symbol of national pride for Ethiopians at home and abroad. The government mobilised funds through bonds, donations, and national budget. Yet, Chinese loans make up roughly 35% of the estimated 5 billion USD. There are some policy lessons for Pakistan from its own history of hydropower development and GERD.

Most importantly, every proposed dam should be funded through project financing. The government must cease to subsidise projects for their lifetime. A special purpose vehicle (SPV) will be established for each project like the Neelum-Jhelum Project Company. The government should then arrange seed capital through public resources and by offering ownership stake in the company to Pakistanis at home and abroad for about 15-20% of the estimated project cost. It’d also be worth utilising the dams fund collected so far for this purpose.

Once the SPV has arranged sufficient equity, it can proceed with issuing bonds. The bonds would offer a mutually beneficial partnership between Pakistani expats and the government: an interest rate of 3-4% at USD-denominated bonds will be quite attractive for expats in western countries and inexpensive for the government, which suffers from a poor credit rating otherwise.

Another upside of bonds is the flexibility in their structure and issuance vis-à-vis project completion stage, which means that the issuer can raise debt capital on periodic basis. It’d help save interest payments worth millions of dollars during the construction phase, which must be a key priority for the government that is devoted to austerity.

The model of project financing alone can ascertain the financial viability of all proposed dams in a discrete manner. Once determined, there is a host of equity and debt financing options available, but they solicit more effort than televising a 10-minute speech for fundraising while invoking grade-2 maths skills.

Let’s hope that the PM and his finance team will roll up their sleeves and put together an immaculate project financing model for the proposed dams, before they emphasise the importance of water reservoirs for the water, energy and economic security of our coming generations .

Published in Daily Times, September 20^th 2018.