Kalabagh Credits: A Provinces-led financial engineering solution

Tanvir Jafri

THE provinces have been at loggerheads over the construction of the Kalabagh dam ever since the project was mooted. The reservations of the smaller provinces in this regard are well known and to some extent stand documented. As such it is logical that any mechanism which involves the provinces in the execution of the project and fully caters to their reservations in financial terms may be well received.
Let us assume that all real and / or perceived losses to the affected provinces can be transparently calculated in monetary terms and a methodology to compensate can be evolved through consensus. It may also be assumed that the provinces can agree to water / power sharing arrangements external to the existing accords.
Based on these assumptions a financial engineering model is being proposed as the way forward. In this model the provinces are to assume a pivotal role in the construction and operations of the Kalabagh dam. This model seeks to allay the prevailing mistrust and also provide for a mechanism to compensate the aggrieved provinces monetarily in the shape of Kalabagh credits.
In order to empower the provinces the formation of a Kalabagh Dam Holding Company is being proposed. This would serve as the major lynchpin in the financial engineering model. The Board of Governors of the company would be responsible for the overall supervision and for ensuring extreme transparency pertaining to each and every aspect related to construction / maintenance of the project and subsequent water / power sharing.
The Board of Governors shall comprise of equal representation from each of the provinces and the federation. The chairmanship of the Board would rotate amongst each province and the federation for the same period of time. The quantum of provincial equity in the company can take two forms.
Option1: Under this scenario each province agrees to forego its grievances / losses and / or rights accruing due to other factors like population weightage etc under any existing arrangements including the water accord of 1991 and consequently each province gets an equal share in the equity of the company and enjoys rights to usage of equal quantities of water and power produced by the company. Of course each province will have to provide funds commensurate to its equity.
In case of this option all provinces shall have to go out of the way to accommodate, specially so the big brother Punjab may have to take things in its stride. This apolitical solution may auger very well for national integration.
Option 2: In case of the second option, the constitution and responsibilities of the Board of Governors remain the same However, all the stakeholders sit down and meticulously work out damages / losses in monetary terms and the affected provinces are compensated before hand in the form of forward Kalabagh credits. Equity in the company and consequent sharing of power and water be worked out in accordance with the existing formulae or a new formula agreed upon by all the provinces. The agreed upon formula may well mimic the provincial shares as reflected in the National Finance Commission award. All maintenance and operational costs shall also have to be shared proportionately in accordance with the worked out equity formula by the provinces.
Financial engineering: This would be carried out through the concept of Kalabagh credits. A Kalabagh credit would be a unit of certain predetermined value, say Rs 10 million or any other amount. The credit unit would confer rights to a certain quantity of water or power upon the holder. (However this quantity may keep on changing in keeping with market forces specially when underlying variables undergo a change). Initially each province would be possessing Kalabagh credits commensurate to its respective equity investment in the project. Thus under the first option all provinces shall have equal credits whereas under the second option the credits held by the provinces would be in accordance with their equity investment.
The concept of Kalabagh credit is somewhat similar to the concept of treadable international carbon credits. Kalabagh credits would be freely tradeable amongst the provinces inclusive of forward trading even before commencement or closure of the project. Each credit would be authorizing use of a certain quantity of water or power to the buyer. However there shall be no cap on trading of the Kalabagh credits. Additionally Kalabagh credits may be purchased by other stakeholders like manufacturing companies, municipalities etc. In fact it can be envisioned that a secondary market for Kalabagh credits may evolve soon.
Provinces may also be allowed to raise funds for their equity from foreign agencies by the federal government as a special case. Of course provinces would be free to use other mechanisms to raise funds including earmarking of provincial resources, raising provincial loans or imposing levies etc. Last but not the least, provinces can raise finances by forward selling of Kalabagh credits to provinces or other entities who would be in need of additional water or power resources and as such may be willing buyers.
The success of the envisaged model primarily hinges on the ability of the Board of Governors of the Kalabagh Holding company to develop trust and confidence amongst all the provinces and the federation and its professional capacity to ensure transparency and consensus for each and every transaction involved in the project including meticulous evaluation of losses expected to be incurred by the provinces and the transparent award of contracts. In case we are able to work out a financial engineering solution as outlined above we may be able to not only neutralize the impending serious water and power shortages but also bring the provinces closer based on the trust developed as a result of intimate political and financial interaction envisaged in the model.
It is possible to also utilize similar models for the construction of other dams and projects. If implemented transparently such an intervention is expected to go a long way in fulfilling our dream of seamless national integration.
—The author is a former civil servant presently working as Head of the China Study Center at COMSATS University Islamabad (tanvirjafri@gmail.com)

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