The Warsak project in Pakistan is designed to provide urgently needed hydro-electric energy for West Pakistan and to irrigate a major portion of the North West Frontier Province. This scheme has been thoroughly investigated by Canadian engineers and is considered to be highly suitable for assistance by Canada under the Colombo Plan from an engineering point of view. A summary of earlier Cabinet decisions concerning the Warsak project, by which $8.9 million in Canadian funds and 10 million in rupee counterpart funds have already been set aside, is contained in Annex I? to this submission. Following the Cabinet decision of March 26, 1953, (the first on Warsak), the Government of Pakistan was informed that additional allotments would be made for this project in subsequent years within the limits of the amount available to Pakistan out of funds appropriated by Parliament for Colombo Plan purposes.⁴⁵

2. The present submission requests authority for the allotment of an additional $5.5 million to Warsak, from funds which would in any case be allocated to Pakistan, to meet the foreign exchange costs of the civil works contract for Warsak Dam and the construction machinery which would be necessary in that connection. A number of important developments since Cabinet last considered the Warsak project in April 1954 have made it necessary to consider the provision of this additional assistance.⁴⁶

3. In the first place, on November 11, 1954 the Canadian High Commissioner in Karachi formally signed on behalf of the Government of Canada, with the Minister of Finance for Pakistan on behalf of his government, a memorandum of agreement and exchange of notes setting forth in detail the responsibilities of the Canadian authorities, of the Canadian consulting engineers (H.G. Acres and Company), and of the Pakistan authorities. In this memorandum provision is made for supervision of the project until completed by the Canadian consulting engineers, in terms which are satisfactory to all concerned.

4. Secondly, H.G. Acres and Company after further investigation recommend that in order more fully to utilize the available potential at Warsak for satisfying the urgent power requirements of the area, the civil works should be prepared for an eventual installed capacity of 240,000 kilowatts (six 40,000 Rw. units) instead of the 150,000 kilowatts mentioned in the original submission to Cabinet. However it is clearly understood that as far as Canadian aid is concerned we will be expected to provide the generating equipment for the first 160,000 kilowatts (four units) only. The Canadian consulting engineers have also recommended changes in the design of the power house, proposing a concrete instead of a rock filled dam, and a surface instead of an underground power house as originally planned. Without any new commitments on the part of the Canadian Government these proposals have been considered by the Pakistan authorities who have approved them, principally on grounds of lower construction costs and increased potential for the generation of electric power.

5. Thirdly, the foreign exchange position of the Pakistan Government has become increasingly acute. Pakistan's dollar reserves have fallen to the lowest level in the country's history and the balance of payments deficit for 1954-55 is expected to be at least $100 million. Reports received confidentially through the International Bank for Reconstruction and Development and through the High Commissioner for Canada in Karachi have stressed the seriousness of this situation. As a consequence the Pakistan authorities are not in a position to meet, as they had originally intended, the heavy foreign exchange costs of the construction contract for Warsak Dam even with the substantial Canada aid already voted for other parts of the project. Consequently a new proposal originated in Karachi during January 1955 by which Canada would assume responsibility for the foreign exchange costs of the contract for the civil works at Warsak and for the necessary heavy construction equipment which would have to be imported from abroad in addition to the undertakings which we have already given with respect to generating equipment, dam gates, structural steel, light construction equipment and supervisory engineering services. This would constitute further aid for a particular project and would not imply a willingness on Canada's part to use Colombo Plan funds for general balance of payments relief. The Canadian consulting engineers have strongly recommended against allowing the contract for the civil works to be let to any existing firm of Pakistani contractors all of which are ill equipped and inexperienced, (this would be the only possibility if Canada were not prepared to finance this element of the project). Canadian officials support their view that for a development of this magnitude a competent and experienced construction firm from outside Pakistan should be engaged. It is proposed therefore that to cover these additional costs totalling $5.5 million, the uncommitted $2.5 million (this figure allows for the additional $500,000 for Shadiwal recommended in another memorandum submitted to Cabinet today) of the funds now set aside for the Punjab hydro-electric installations as approved by Cabinet for the 1954-55 Canadian Colombo Plan programme in Pakistan be transferred to the Warsak project. The Pakistan authorities have indicated their agreement to such a transfer. This would leave a further $3 million which would have to be met by transfer from funds already allocated to other projects in the 1954-55 programme, or from the 1955-56 Colombo Plan vote shortly to come before Parliament for approval.⁴⁷

6. This proposal would have substantial incidental advantages from the point of view of the efficiency of our Colombo Plan operations in Pakistan. It would also provide further employment for Canadian industrial skill, personnel and equipment in the construction industry. In addition the Pakistan Government would not have to be counted on to meet large foreign exchange expenditures, which to judge from the present position they would almost certainly find themselves unable to meet now or even at a later and possibly more difficult financial period. By appointing a Canadian contractor for the civil work we would also acquire further control over the development of the project and thus be better able to ensure its success. It has been ascertained that there are Canadian firms capable of undertaking this work.

7. The Pakistan authorities would still be expected to supply all local labour and material and to meet other rupee costs. In fact the Pakistan Government would be financing from their own resources about one-third of the total cost of Warsak even if the present proposals for an additional allocation of $5.5 million are approved. It would appear that the Government of Pakistan will be able to finance these local costs from its domestic rupee resources.

8. After allowing for this present submission and taking into account previous allocations to Warsak there would still remain $11.2 million which may be requested from the Canadian Government in the light of its earlier agreement to meet additional costs at Warsak if funds become available from Pakistan out of future Colombo Plan votes. This figure of $11.2 million is an outside estimate including allowance for a small increase in the costs of the civil works to make it possible for them to accommodate an eventual generating capacity of 240,000 kilowatts, and $2.5 million for cement, a large part of which the Pakistan authorities may be able to provide. Therefore the final total for additional Canadian aid to Warsak may be below this figure. The entire $11.2 million could be financed out of the remainder of the Pakistan portion of past votes together with the normal Pakistan share of the 1955-56 vote if no other projects are undertaken.

9. It should be added however that Pakistan has indicated that it may wish Canada to proceed urgently with a project for construction of a high tension electric transmission link between Dacca and Chittagong in East Bengal at a cost of approximately $4 million. While there has been no formal commitment to the Pakistani authorities to proceed with this project as authorized by Cabinet on April 29, 1954, extensive consultations have taken place with Pakistan, the International Bank and the FOA looking toward ultimate construction of the link.⁴⁸ This project, if undertaken, would necessitate spreading the additional expenditure expected on Warsak beyond the $5.5 million covered by the present memorandum over the entire period of the Colombo Plan now scheduled to end on June 30, 1957. This would be consistent with the original Cabinet decision on Warsak and would have the advantage of permitting a more flexible Canadian Colombo Plan programme for Pakistan.

10. In short the whole of the possible future Canadian expenditures on Warsak could be financed out of past votes plus the vote for 1955-56; however, if it is decided to provide a further vote in 1956-57 (which is still within the 6 year period of the original Colombo Plan) it may well prove preferable to allocate some of that year's contribution to Warsak thus releasing some of the 1955-56 vote for other purposes.

Recommendation

With respect to the immediate problem of the construction contract it is recommended:

(a) that Cabinet approve the allocation of a further $5.5 million to meet the foreign exchange costs of the contract and the equipment necessary for the construction of Warsak Dam, $2.5 million to come from funds already set aside for the Punjab hydro-electric schemes and the remainder from funds to be voted in 1955-56 or from funds already earmarked but not definitely committed from earlier votes;

(b) that the contract for Warsak dam be let by the Canadian Government in accordance with established procedure for similar contracts in Canada. The firm selected must be capable of carrying out the project efficiently and economically and should employ a high proportion of Canadian personnel in key posts at the Warsak site in Pakistan. It is anticipated that the equipment to be purchased in Canada for the construction work would be of approximately 65 percent Canadian content.⁴⁹

L.B. PEARSON