BHEL and MHPA resolve issues amicably as two Governments step in

Outstanding Nu 70 mn BVT Commission not to be paid

In August 2021, Bharat Heavy Electricals Limited (BHEL), an Indian Public Sector Undertaking (PSU), had taken Mangdechu Hydro electric Project (MHPA) to Delhi High Court after MHPA said it would deduct Nu 250 mn of BHEL’s Nu 700 mn bank guarantee after MHPA had to conduct extensive repairs to a BHEL supplied faulty third turbine unit.

Though the contractual agreement between BHEL and MHPA clearly says that any dispute between two sides will be adjudicated in Bhutan under the Bhutanese judicial system, BHEL took the action to freeze the cashing in of the bank guarantee from an Indian bank named Allahabad Bank.

Given that both the companies are owned by their respective governments, the two governments decided to step in to resolve the dispute between BHEL and MHPA.

The Minister for Economic Affairs Lyonpo Loknath Sharma said that the Bhutanese government nominated Bhutan’s Ambassador to India Major General Vetsop Namgyel and the Indian government nominated the Indian Ambassador Ruchira Kamboj.

The two ambassadors took feedback from all sides on the matter which included BHEL, MHPA and Druk Green Power Corporation.

In the end, it was decided that BHEL would first withdraw its case for which it sent a letter to court withdrawing the case.

It was then decided that MHPA will not deduct the Nu 250 mn bank guarantee for the unit three repairs.

In return, BHEL will not raise its around Nu 300 mn bill which it claims are for additional works and time overruns. 

So in the end both sides will not pay each other any money.

One main consideration for the solution was also the fact that the third unit is now operating smoothly and the project overall has generated good revenue for Bhutan.

Both sides also did not want the matter to be handled in the courts as a dispute, given the friendly ties between the two countries.

Of the around Nu 300 mn additional bills that BHEL raised around 70 mn was to do with a controversial and illegal 1.35% commission promised to Bhutan Ventures Trading (BVT) a local company by BHEL for supplying Nu 14.2 bn of electro-mechanical parts to Mangdechu and PHPA II in 2010. This commission would be an an additional financial burden of Nu 197.897 mn to both the projects.

After this paper raised the issue in 2014 subsequent payments were withheld and in 2019 the MHPA asked BHEL to terminate BVT as an agent. BHEL first resisted but later complied and terminated BVT.

The MHPA then decided to deduct the 70 mn as the commission amount due in its payments to BHEL. However, BHEL said that while it terminated BVT it would still like to have the Nu 70 mn payment.

BVT was also terminated by BHEL from the P II project in 2019 and a senior official there too claimed that no further commission amount was paid.

As per the 2019 ACC investigation BVT claimed that it only received Nu 18.80 mn of which Nu 12.17 mn was from PHPA II and nu 6.62 mn from MHPA, and after the 2014 media coverage by The Bhutanese it did not get further commission

Background

The troubled third unit supplied by BHEL in Mangdechu has given problems right from the beginning itself. In September 2019 this unit applied the breaks on itself leading to the break pad finishing and a lot of carbonization that spread throughout the equipment.

The same unit again gave problems on 23rd May 2020 in the peak monsoon season and there was a shutdown till 27th June 2020. This is where most of the Nu 1.3 bn in revenue loss happened in 2020.

A major failure and fire took place on the same unit in 21st September 2020.

On 27th January BHEL was given a Nu 162 mn tender to fix the third unit and BHEL also joined in the repairs and the third unit was up by late July 2021.

Here a revenue loss of Nu 1.2 bn or more is anticipated since the third unit was out of action during the peak monsoon period.

After the repairs, the MHPA informed BHEL that it would be deducting the repair cost from the BG since the unit malfunctioned well within the defect liability period and so BHEL was responsible to pay for the repairs.

What bolstered the case of the MHPA was that an independent four-member committee constituted by the Mangdechu Project with three experts from India found that BHEL is responsible for the failure of the third unit.