Even China Won’t Finance 4.5-GW Pakistan Hydropower Plant as Water Fight Looms

China’s $45 billion push into Pakistan is skirting one of the Indian subcontinent’s most dangerous flashpoints. The proposed 4,500-megawatt Diamer Bhasha hydropower plant would eliminate about half of Pakistan’s power shortfall and irrigate millions of acres of parched farmland. While both the U.S. and China have promised to help Pakistan court private investors for the dam, they’ve resisted putting up the cash themselves.

The proposed 4,500-megawatt Diamer Bhasha hydropower plant would eliminate about half of Pakistan’s power shortfall and irrigate millions of acres of parched farmland. While both the U.S. and China have promised to help Pakistan court private investors for the dam, they’ve resisted putting up the cash themselves.

China’s reluctance shows that its push to finance infrastructure across Asia hardly amounts to a blank check. It also keeps Beijing’s leaders away from a project in a disputed area that has triggered three wars between Pakistan and India, where tensions over shared waters are rising.

“China is doing a smart thing by putting money up for smaller projects with better returns,” said Priyanka Singh, an associate fellow at the New Delhi-based Institute for Defence Studies and Analyses, who has published papers on the Diamer Bhasha project. “China has made its calculations and concluded that it doesn’t directly serve its interests.”

On a visit to Islamabad this week, Chinese President Xi Jinping picked a $1.65 billion, 720-megawatt hydropower plant in Karot, Pakistan, as the first project for his $40 billion Silk Road fund to build infrastructure in Asia. He made no mention of the Diamer Bhasha project, whose cost has risen to more than $12 billion since it was first proposed in 2001.

China Wary

China is unlikely to fund Diamer Bhasha because it doesn’t want to get involved in a water dispute between India and Pakistan, said a senior Chinese water resources official, who declined to be identified because the information isn’t public. Funding for the smaller project would show sufficient Chinese commitment to Pakistan’s power sector, the official said.

Electricity projects account for about half of a proposed $45 billion economic corridor between the countries that would provide another route for China to export goods to Europe and import oil from the Middle East. While some road and rail links run through disputed territory, the dam is opposed by India.

India and Pakistan have fought for almost seven decades for control of Kashmir, a region nestled in the foothills of the Himalayas, the source of water for a quarter of the world’s population. Melting glaciers and poor water management are stoking a crisis that threatens to intensify tensions between the nuclear-armed neighbors.

‘Drastic Measures’

“Water is front and center to the Kashmir conflict,” said Michael Kugelman, a South Asia expert at the Washington-based Woodrow Wilson International Center for Scholars. “As the stakes go up and water scarcity intensifies in both countries, both sides will be more willing to take drastic measures to safeguard what they feel are their strategic interests, which includes having some modicum of water security.”

In 2010, Pakistan suffered its deadliest floods on record, leading to almost $10 billion in damage. Last September, India’s Jammu and Kashmir saw its worst flooding in more than half a century after the state received more rainfall in three days than it typically gets in a month.

The 1960 Indus Water Treaty intended to defuse tensions by clearly delineating how India and Pakistan would share the resource. It gave rights to the Sutlej, Ravi and Beas rivers to India and the Jhelum, Chenab and Indus — where the Diamer Bhasha dam is planned — to Pakistan. It also prohibits India from storing water or diverting flows to deprive Pakistan.

Militant Groups

If water pressures become extreme, India may violate the treaty to store water, Kugelman said. In a worst-case scenario, anti-India groups in Pakistan could use water as a pretext for launching a terror strike on India, prompting limited, retaliatory military strikes by India inside Pakistan.

“If that happens, the state of affairs on the subcontinent could get very ugly, very fast,” he said.

It’s not a far-fetched scenario. Hafiz Saeed, founder of the Pakistan-based Lashkar-e-Taiba militant group, accused Indian Prime Minister Narendra Modi’s government of triggering the September floods by discharging dam waters without warning into Kashmir. He previously threatened to wage war with India over water in a 2010 television interview.

Pakistan is one of the world’s most water-stressed nations, mostly due to mismanagement. The country loses about two-thirds of its available water due to the lack of transmission capacity or poor irrigation techniques, according to a study by Pakistan’s Nuclear Institute of Agriculture.

The country typically gets half its annual rainfall in July and August. Yet it doesn’t have the capacity to store more than a 30-day supply compared to the 1,000 days recommended for countries with a similar climate, according to the Asian Development Bank.

‘Life and Death’

“We need water for our future food security, and we need power for our future growth,” Ahsan Iqbal, Pakistan’s minister for planning, development and reforms, said in an interview in Islamabad on March 30. “It’s a matter of life and death for the future of Pakistan’s economy.”

Pakistan sees the Diamer Bhasha project as an answer to many of its problems. If built, the hydroelectric plant would singlehandedly boost the energy-starved nation’s power capacity by 20 percent, enough for 41 million people. It could also store 8.1 million acre-feet of water and provide irrigation for 4 million acres.

First proposed in 2001, successive governments have struggled to raise funds from multilateral lenders or private- sector companies. Pakistan Finance Secretary Waqar Masood said in a phone interview last month that China Three Gorges Corp., which is building the Karot dam, was looking into Diamer Bhasha. He didn’t respond to a call on Wednesday.

U.S. Involvement

Beijing-based China Three Gorges doesn’t have a comment, according to a man who answered the phone at the company’s media department and declined to identify himself. Calls to a general line at China’s water resources ministry weren’t picked up, and its website didn’t list a media contact.

The U.S. Agency for International Development, one of the biggest funders of energy projects in Pakistan, is helping the nation conduct due diligence for Diamer Bhasha, including environmental studies. The dam would provide electricity, create jobs, help irrigation and reduce flooding, it said in an e-mail.

The Asian Development Bank will continue to support the project, it said in an e-mailed response to questions. The bank is required to seek “no objections” from member countries for projects in disputed territories, it said.

‘Foolish Enough’

India planned to lodge a protest through diplomatic channels after USAID organized an October event in Washington to promote the project, India’s Economic Times reported, citing sources it didn’t identify. India’s Ministry of External Affairs didn’t respond to an e-mail and phone call seeking comment.

Beyond the territorial concerns, the size of the dam means that Pakistan would need to pool money from different institutions to make it a reality, according to Nadeemul Haque, former deputy chairman Pakistan’s Planning Commission and an International Monetary Fund economist.

“It’s a very big project, and the world isn’t foolish enough to invest in it,” Haque said by phone from Washington D.C. “China will invest in those projects which will guarantee quick money and they could execute themselves.”

Copyright 2015 Bloomberg

Lead image: Hydropower plant. Credit; Shutterstock.

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