A hydro reality check for the two parties and how govt revenue, economy & pay hikes hinge on it

Both the Druk Phuensum Tshogpa (DPT) and the Druk Nyamrup Tshogpa (DNT) have stated hydropower as being the most important aspect of their economic pledges.

DPT and its candidates have said that that hydropower will be their main tool to achieve self sufficiency by 2025.

DNT has said that this sector will continue to be the backbone of the economy in achieving sustainable and equitable socio-economic development.

Hydropower by far is the largest source of internal revenue contributing around 25 percent of the total internal revenue and it is only set to increase as projects are completed. Even the civil service pay hike promised by both parties is related to and hinges on revenue from hydro projects as pay hikes in the past have been largely linked to hydro income.

Mangdechu tariff & other tariffs

For any party that wins, the main reality check is that the tariff rate for the 720 MW Mangdechu project, which is to start commissioning by November 2018, is yet to be finalized. The rate of tariff, high or low, will have a major budgetary impact on the 12th plan revenue projections and also influence the future tariff negotiations for the 1,200 MW Punatsangchu I and 1,020 MW Punatsangchu II.

In short, the Bhutanese side under the former PDP government had been negotiating to get Nu 4.90 per unit though the Indian officials had offered around Nu 3.50. Since Mangdechu will produce around 3 bn units a Nu 4.90 tariff would have meant Nu 14.7 bn in annual revenue of which around half or so would go for loan payment and the rest would be revenue.

Indian officials were offering a rate as per their formula while the PDP government wanted a higher rate as per its calculations and also based on the fact that hydro projects in Bhutan are not only economic projects but also ‘powerful symbols of friendship’ between the two countries.

This was conveyed as such by the former Prime Minister Dasho Tshering Tobgay to Prime Minister Narendra Modi, Indian Power Minister and others.

There has been three rounds of tariff negotiations and officials from both sides have largely stuck to their positions and rates. The political leadership of India and Bhutan was supposed to agree to the Mangdechu tariff rate before the commissioning of the project in the end of November 2018.

This is because in the tariff negotiations in the past the setting of electricity tariffs and increases in tariff rates have largely been political decisions based on the friendship between the two countries.

In the 1020 MW Tala project tariff negotiations in 2006, the Indian team was offering a lower rate that what the Bhutanese side wanted. Here the political leadership of both countries stepped in and the final rate was much higher than what the Indian officials or agencies offered.

Similarly, in the 336 MW MW Chukha project though the tariff hikes are meant to be given every four years and are based on certain calculations, it was given out of turn and at higher rates, mostly coinciding with official visits of His Majesty The Fourth King to India.

In 2014 and 2018 the Indian hydropower officials as per their calculations offered much lower tariff hikes for Chukha than what Bhutan wanted, but in both instances much higher hikes were given after the former government took up the issue politically with the political leadership in New Delhi. The 30 cheltrums per unit hike of 2018 was higher than even what Bhutan asked for.

On the other extreme when relations between the two countries were at a low in 2013 the Indian government conveyed its intent to reduce the Chukha tariff substantially. The official reason given then was that a hike agreed to in 2004 had the Ministry of External Affairs bearing a 45 cheltrums per unit subsidy. The issue was, however, dropped after the elections.

Again in 2013, MEA sources in India told the Indian media that given the poor state of relations with Bhutan, it was looking at reducing the grant component for hydro projects from 30 percent to 10 to 5 percent and also at increasing the loan interest rates for the projects to reflect commercial borrowing rates. The issue was not taken further after the 2013 polls.

Any party coming in as the government on 18th October will have to start negotiating with the Indian government on a higher tariff rate for Mangdechu project based not only on cost plus calculations but also on political goodwill and ties as a significant part of the 12th plan revenue projection will depend on it.

Tariff impact on 12th plan and pay hikes

The latest draft 12th plan has a Nu 315 bn outlay of which around Nu 60 bn will be grants from donors (kept to the 11th plan level), Nu 228 bn will be domestic revenue and there is a shortfall of around Nu 27 bn.

According to a senior government official the GNHC had factored in the revenue projection based on part with the expectation of a high tariff rate from the Mangdechu project tariff negotiations.

The official said that the 12th plan had factored in a 30 percent pay hike for civil servants based on the current revenue projections.

The history of hydropower in Bhutan has been linked to civil service pay and pay hikes as hydro revenue is an internal revenue which can be used for current expenditure of which the biggest component is pay.

When Chukha was fully commissioned in 1988 there was a major improvement in civil service pay and conditions, and subsequently pay hikes were linked in large part to tariff hikes of the Chukha project as the country’s main economic workhorse.

In 2006 when the Tala project was commissioned there was a 55 percent pay hike given for civil servants.

Hikes in 2009, 2011 and 2104 have all been related to steady hydro revenue or as in the case of 2014- a tariff hike.

The former government had announced that it cannot afford another civil service hike but one would be possible in the 12th plan due to Mangdechu project coming online.

Further Delays in P I and P II

The Mangdechu tariff negotiation becomes all the more important due to additional delays in the Punatsangchu I and II projects.

The last completion date for P I was by December 2022 but it now will be completed only by the first half of 2023 provided there are no more geological surprises.This effectively takes the P I project into the 13th plan. This means that plan officials will have to give up on the few months of revenue that would have come from the P I project in the 12th plan.

P II was last supposed to be completed by December 2021 but now this has been moved to the first quarter of 2021 and so here to GNHC officials will have to factor in lost revenue of a few months.

This pushes the main burden of revenue generation on Mangdechu project and more importantly on what tariff rate can be secured for it.

2,560 MW Sunkosh and 2,640 MW Kuri Gongri reservoir projects

The Sunkosh and Kuri Gongri projects unlike all other projects are reservoir projects that will store large amounts of water and thereby have the ability to generate higher revenue by producing power when it is most in demand.

Both projects were in the 10,000 MW by 2020 list announced in 2008 but by 2009 itself there were financing concerns and nothing much moved on these two mega projects.

The Indian President during a visit to Bhutan in 2014 confirmed India’s reluctance by announcing that only P I, P II, Mangdechu and the four joint venture projects power projects would be possible by 2022 coming to 5050 MW.

Sunkosh and Kuri Gongri were not on the list. Before the President’s visit the Detailed Project Report (DPR) for the Kuri Gongri project was put on hold signaling the freezing of this project.

In 2015 the Joint Secretary North of the Ministry of External Affairs in a visit to Bhutan made it clear that the Government of India cannot fund the entire Sunkosh and Kuri Gongri projects given the size of the investments required.

This was supposed to be a quite burial to the two mega projects for the foreseeable future.

However, the former Prime Minister Dasho Tshering Tobgay refused to accept this economic burial and started following up politically with New Delhi right from the Indian Prime Minister and downwards impressing upon them the importance of the two projects for Bhutan and also for diplomatic ties between the two countries. He used the goodwill for Bhutan and his government.

In 2016 the 2,640 MW Kuri Gongri project got a lease of life as the DPR which had been frozen since September 2014 could continue as India released Nu 120 mn in funds for the DPR likely to cost a total of Nu 400 mn.

In 2017 there was another major outcome of all this hectic lobbying by the former government and PM when the Indian government gave an in principal commitment to Sunkosh as an inter-governmental project.

However, there is still a long way ahead as the new government will have to negotiate and secure a formal agreement from the Indian government on Sunkosh, which is yet to come. Nothing will move until such an agreement is signed.

Importantly, the new government will have to negotiate the funding modality of the Sunkosh project. All of this again, like in the case of tariffs, will be down to using political decisions and using the the friendly relations of the two countries.

In the case of Kuri Gongri, the task for the new government after the completion of the ongoing DPR will be to convince the Indian government to take up the project immediately. The new government will have to politically lobby for such a huge mega project to happen soon after the DPR.

If this is not done, then there is every possibility of the Indian government sitting on the DPR report for years, given the huge financing required for this project which can generate around twice the power of  Sunkosh.

Joint Ventures and CBTE

Bhutan and India agreed as part of the 10,000 MW by 2020 to the four Joint Venture hydro projects of the 770 MW Chamkarchu project, 600 MW Kholongchu project, 570 MW Wangchu project and the 180 MW Bunakha project coming to a total of 2,120 MW. The JV’s have 50 percent Indian PSU companies’ ownership and 50 percent ownership by Bhutan through DGPC.

The JV projects were stuck for many years right from 2008 due to excessive demands of the India PSUs and refusal to follow the larger JV agreement between the two countries.

Just when these issues were mostly resolved the Cross Border Trade in Electricity guidelines was issued by India on 5th December 2016 with the intention of governing cross border electricity trade between India and all its neighbors.

However, provisions of the CBTE, was seen to not be in Bhutan’s interests as it put Bhutan at a disadvantage in setting future tariff rates beyond the current government to government formula, denied Bhutan access to India’s primary power market where tariff rates are more competitive and restricted the type of hydropower investments that could be made in Bhutan. CBTE even asked that any power trading company exporting power to India from another country would be required to have 51 percent Indian ownership.

Though senior Indian officials including the Central Electricity Authority (CEA) said exceptions would be made for Bhutan, this was not seen as satisfactory, as the PDP government wanted the rules to be clear in black and white instead of there being any verbal exceptions.

In a bold move Bhutan refused to sign the Concession Agreement for the 600 MW Joint Venture Kholongchu project unless CBTE was resolved. The Indian government formed a high level committee to address the issue but a report is yet to come.

Apart from CBTE it has been found that the Bunakha reservoir JV is too expensive by itself and needs cost sharing by Tala, Chukha and Wangchu who will benefit from the upstream Bunakha reservoir.

While Tala and Chukha are game the Wangchu JV partner, which is SJVNL- is refusing to cooperate.

The new government will have to negotiate the CBTE and Bunakha issue and this again will require taking up the matter politically with New Delhi.

Private sector ownership

The DNT and the DPT are both at odds over the role of private sector in owning hydro projects in Bhutan.

DNT in many of the debates has criticized DPT on this and different DPT candidates have given differing stands.

Now the DPT General Secretary Sangay Phurba said that while it will not allow private ownership of mega projects like in its 10,000 MW by 2030 target, it will look at the possibility of involving the private sector in mini and micro hydropower projects.

He said these projects could even have joint ownership with the government.

He said as far as mega projects go the private sector will be encouraged to take part in the construction part of it. The DPT manifesto says that it will promote private sector participation in hydropower projects.

The DNT spokesperson Tandin Dorji said his party has made it clear that hydro projects, even if they are mini or micro cannot go into the hands of a few people as they are the nation’s resources.

Criticizing the DPT position he said that DNT’s fear is that DPT will start with mini and micro and then eventually scale up to hand big hydro projects to big private companies.

As far as private ownership goes in mini and micro hydro projects, both the parties have different stands and the policy will move in accordance with whoever is elected.

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