NWFP PLANS TO FINANCE SECURITY AND RECONSTRUCTION

C O N F I D E N T I A L PESHAWAR 000184


E.O. 12958: DECL: 9/3/2019
TAGS: ECON PGOV PTER EAID PK
SUBJECT: NWFP PLANS TO FINANCE SECURITY AND RECONSTRUCTION

CLASSIFIED BY: Candace Putnam, Principal Officer, U.S. Consulate
Peshawar. REASON: 1.4 (d)


1. (C) Summary: The Northwest Frontier Province (NWFP)
government finally has received the first tranche of a 24
billion rupees (USD 291 million) revenue transfer from the
Pakistani federal government; it will spend half of this to
support the planned 2,500 Elite NWFP Police force and double the
Malakand police force. The rest will be used to add 2-3 wings
to the Frontier Corps and another 100 platoons to the Frontier
Constabulary. NWFP Chief Minister Hoti has also launched a bid
to increase the province's share of national tax revenue during
the upcoming National Finance Council meeting and is pressing to
expand the NWFP's share of hydroelectric revenue from Pakistan's
Water and Power Development Authority (WAPDA). If Hoti
succeeds, it will allow the NWFP to further expand security
forces, supplement donor funding for reconstruction of
conflict-affected areas, and cover the gap in its hopelessly
unrealistic 2009-2010 budget. End summary.


2. (U) In a series of initial courtesy calls by PO on key
NWFP government policymakers, PO's interlocutors repeatedly
raised the need for the province to increase the revenue
required to improve law and order and fund reconstruction in
conflict-affected areas. Meetings in which the issue was raised
included courtesy calls on: NWFP Chief Minister Amir Haider
Hoti, on August 25; NWFP Chief Secretary Javed Iqbal, on August
25; the ruling Awami National Party's NWFP chief Senator
Afrasiab Khattak, on August 25; NWFP Inspector-General of Police
Malik Naveed, on August 26; Frontier Constabulary
Inspector-General Zafar Ullah Khan; NWFP Senior Minister Bashir
Bilour, on August 27; and PaRRSA Director Shakeel Qadir Khan on
September 1.


Promised Security Supplement Arrives
--------------


3. (SBU) Chief Minister Hoti confirmed to PO that the NWFP
government had received the first tranche of a 24 billion-rupee
(USD 291 million) revenue transfer from the federal to the
provincial government. Half of the spending supplement,
promised by President Zardari in June, would be allocated to the
NWFP police and would fund the planned 2,500-strong "elite"
force, along with a doubling of the numerical strength of the
police in the Malakand division. The balance would be split
between the Frontier Corps, which would be able to add an
additional 2-3 wings (battalion equivalent) and the Frontier
Constabulary, which would add an additional 100 platoons.
Police IG Malik Naveed boasted to PO that the money going to the
police would allow the recruitment of 6,000 additional police,
along with several new barracks facilities in Mansehra, Hangu,
and Kohat.


4. (C) Chief Secretary Javed Iqbal told PO that this phased
two-year transfer to the NWFP (unusual in Pakistani government
interplay and the first transfer from the federal to the NWFP
government since the ANP took office in February 2008) was most
likely a reaction to the province's cancellation of its
2008-2009 Annual Development Plan in order to pay increased
salaries to a police force plagued by low morale and increasing
desertion. This had forced the federal government to take
similar action to prove its seriousness in fighting terrorism.

Brinkmanship at the NFC
--------------


5. (C) Iqbal hoped that the cancellation would also
strengthen the NWFP's case at the upcoming meeting of the
National Finance Commission (NFC),which is planned for
September and will redistribute the percentage of tax revenue
going to the federal government and the four provincial
governments. In preparatory sessions for the NFC meeting, the
NWFP joined the other provinces in lobbying for a change of the
revenue sharing formula; the NWFP is not guaranteed to win all
it wants in this battle for resources. As the provincial
government has, on the basis of the existing arrangement,
assumed a transfer of 68 billion rupees (USD 825 million) in its
2009-2010 budget, such an increase would potentially add another
USD 100 million in discretionary funds for the next fiscal year.


6. (SBU) The NWFP government's stance that the NFC should
increase the NWFP's distribution of revenues has unsurprisingly
been popular in the province, and the NWFP political parties
have been struggling to outbid one another to take the most
extreme position on how much extra money the NWFP should get.
An all-parties meeting called August 27 took a much more
confrontational stance on the percentage of overall revenue that
the NFC should award the NWFP than that posited by Hoti and
Iqbal. The NWFP government, however, appears to be using its
stance on the NFC as a bargaining chip in a negotiation that
promises even more potential funding for the province - the
retrieval of arrears from the Water and Power Development
Authority.


Collecting from WAPDA
--------------


7. (SBU) The provincial government has been threatening to
boycott the NFC unless the federal government intervenes to
force settlement of a long-running dispute between the NWFP
government and WAPDA, the state-owned corporation which is the
primary operator of hydropower generation facilities in Pakistan
(the bulk of which are located in the NWFP). According to the
operational contract concluded between the NWFP and WAPDA, the
NWFP was entitled to a portion of the proceeds of the WAPDA
facilities in the province, which according to the NWFP
government was supposed to rise over time as WAPDA's revenues
rose. Instead, WAPDA had paid the same amount to the NWFP
government each year since 1985. Afrasiab Khattak told PO that
the federal government had initially arbitrated the dispute
between the NWFP government and WAPDA; WAPDA had refused to
accept the arbitration's 2005 conclusion, and the NWFP
government had taken the dispute to the courts.


8. (C) The arbitration tribunal had ruled that WAPDA owed
the NWFP 110 billion rupees (USD 1.34 billion) in arrears. (By
way of comparison, the total projected budgetary revenue of the
NWFP for fiscal year 2009-2010 will be USD 2.57 billion.) If
enforced, the judgment also would establish a new, higher annual
payment by WAPDA to the NWFP government; Hoti optimistically
estimated that this should be approximately 30 billion rupees
(USD 364 million) instead of the current 6 billion (USD 73
million). Javed Iqbal told PO that he was reasonably sure that
WAPDA would soon come to a settlement with the NWFP government
rather than attempting to continue litigation, and in a
September 1 press conference, NWFP Chief Minister Amir Haider
Hoti stated that the NWFP was satisfied with the efforts that
the federal government had made to facilitate a settlement with
WAPDA, indicating that such a settlement was imminent.

NWFP's Future is Hydrocarbons
--------------


9. (C) In the deeper future, Iqbal saw revenues from oil
and gas production outweighing even the potential gains from a
larger share of hydroelectric revenues. He noted that gas
production in Kohat, Hangu, and Karak districts had just begun
(he estimated 7.5 billion rupees - USD 90 million in revenues
this year),but it was rapidly expanding. The NWFP government
had asked the federal government for visibility into, and a
percentage of, the revenue, but had not yet received a response;
after the NFC and WAPDA issues were resolved, it would demand
such a stake in the field.


10. (C) Comment: The NWFP government's receipt of the first
tranche of Zardari's promised security assistance will allow it
to move ahead with several needed security improvements and
indicates the seriousness of the federal government in
supporting the war on terrorism in the NWFP. It is difficult to
determine how realistic the NWFP policymakers' projections may
be for increasing other federal/WAPDA revenues, but the positive
tone of PO's interlocutors has been a far cry from the
complaints we have previously heard about lack of federal
government support. All of these redirections of funds will
come at the expense of other Pakistani government priorities
(and it is unclear whether WAPDA could even pay its arrears).
However, if the NWFP's gains even approach the numbers being
discussed, they would allow the NWFP to cover its current
deficit budget, provide for security contingencies, and support
reconstruction efforts. A cash windfall also would allow the
Awami National Party-led NWFP government to boost its
diminishing popularity by delivering on promises to improve law
and order and the quality of life.


PUTNAM