O 031109Z SEP 09
FM AMCONSUL PESHAWAR
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AMCONSUL PESHAWAR

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