Concerns now abound on loan repayment in what has become Bhutan’s most expensive hydro project
The Bhutanese has found that a cabinet decision made on the basis of inaccurate technical information in 2008 played a major role in the ballooning of the Punatsangchu 1 (P 1) project cost to Nu 94 bn.
In June 2008 the cabinet based on a presentation of the Punatsangchu Hydroelectric Project Authority (PHPA) agreed to shift the location of the P 1 dam 1.4 km upstream from the original site chosen by WAPCOS.
The justification given then was that the new location at 7.1 km downstream of the Wangdue Bridge would have an easy to reach hard rock bed surface at 30 meters, and would generate an additional 105 MW at only an additional cost of Nu 1.2 bn on the total project cost of Nu 35.14 bn. This would increase the power generation of 5.2 bn units to 5.7 bn units.
However, when construction started the dam construction company could not find the hard rock at 30 meters and had to dig till a record 74 meters. This additional dam depth hugely increased the entire project cost as the dam is the biggest and most expensive component of any project.
The cost shoots up
In 2006 the estimated cost of the dam was Nu 7 bn but in 2009 it was tendered for Nu 12.45 bn to Larsen and Toubro and now in 2013 the completion cost of the dam mainly due to the additional depth was announced at Nu 37 bn. By comparison the entire Tala project was completed for around Nu 41 bn in 2007.
Similarly the P 1 project cost estimated in 2006 was Nu 35.14 bn which in a 2012 interview with this paper was quoted at Nu 66 bn by the PHPA MD R.N Khazanchi. The latest figure is Nu 94 billion.
The MD in reply to a question said that there would be no assurances that the price would not rise beyond 94 bn in the event of something unnatural happening.
PHPA’s latest cost completion figures for P 1 acknowledges that of the 94 bn figure around 54 percent increase was due to geological and design changes including relocating the dam and only 46 percent was due to inflation.
Criticism of cabinet decision on dam relocation
The PHPA’s flawed depth perception of 30 meters, the exorbitant increase in the project cost and the cabinet decision which was made without asking for more research or consulting more experts have come in for increasing criticism from both government officials and also those in the private sector.
A government official on the condition of anonymity said, “Our project were among the most cost effective in the world coming to around or less than 1 million USD for 1 MW but this project has increased it to around 1.4 mn USD per MW.”
A Bhutanese contractor involved in the hydro projects who also wanted anonymity said, “What we saw was the dam contractor digging for months and still not finding the rock bed which hugely escalated the cost. The government should have either done more studies or consulted other experts before making such an expensive decision.”
The contractor said that if the cabinet had known that the new location was 74 meters and not 30 meters deep then perhaps more studies could have been done to get a dam site that was not as deep and would still generate 1200 MW saving billions in construction loans for Bhutan.
The original dam location of WAPCOS would have flooded only around 20 acres affecting very few households. But the current location of P 1 approved by the cabinet has lead to the submergence of around 70 acres of cultivable land affecting around 90 households. Many of them are not happy with their compensation packages.
Loan repayment concerns
There is also now increasing concern on the loan burden of the project given that the funding is 60 percent loan at 10 percent interest with only 40 percent grant. This is compared to Tala which was 40 percent loan at 9 percent interest and 60 percent grant.
Of the 94 bn project cost for P1 Nu 56.4 bn is the loan cost.
Including the interest component P 1 will have to pay around Nu 10 bn every year for 12 years from the date of the completion of the project to pay of its loan. On the other hand if the P 1 project with its currently estimated 5.6 bn units exports at the same tariff price as Tala at Nu 1.95 per unit then the total revenue would only be Nu 10.10 bn. This would only give a profit of Nu 100 mn for P 1 after loan repayment.
This is keeping in mind that the completion cost of Nu 94 bn could increase if there are other geological surprises.
Dam increases the highest
The relocation of the dam apart from inflation also increased the cost of the headrace tunnel (HRT) due to the increased length from 7.4 km to 8.9 km and an additional 45 meters of steel lined pressure shaft. The HRT cost went up from Nu 4 bn to Nu 6.8 bn.
As per the completion cost estimate given by PHPA recently the second biggest increase in project cost component after the dam is the power house which increased from 3.8 bn to 11.6 bn which is a 300 percent increase. Other major component like transmission lines increased by around 90 percent, electro mechanical works by 70 percent.
However, the dam by comparison had increased by more the 500 percent mainly due to the unaccounted for depth of the riverbed.
PHPA says a mistake was made
The PHPA MD R.N Khazanchi admitted that there had been an error in estimating the dam depth at 30 meters below the river bed due to preliminary studies. He said it was later found that the dam depth was around 74 meters.
He also admitted that since the depth was eventually found at 74 meters it had become a major factor in the increase of the cost of the dam. He said of the Nu 37 dam completion cost around Nu 11 bn would account for inflation and the remaining 25 bn would account for the increase in the depth of the dam.
Not a big difference in cost?
The PHPA MD, however, said that even if the dam was constructed at the original WAPCOS site the depth of the dam below the river bed would be 73 meters without the additional 105 MW. He also reasserted that this was the best location scouted for the dam.
He said the new dam was slightly shorter and narrower than the old site dam. According to PHPA figures the current P1 dam is 130 meters in length and 239 meters in breadth while the old site dam would be 137 meters in length and 281.5 meters in breadth. The MD said that dam on the old site would have been as expensive without the benefit of the additional 105MW.
However, contradictory to the PHPA MD’s assertions of the new dam being smaller the Detailed Project Report of P 1 project shows that the old dam would have been 0.660 mn cubic meters compared to the current dam which is around 1.5 mn cubic meters.
The PHPA MD, however, asserted that the 0.660 mn cubic meters in the DPR was an underestimation.
The Inflation debate
The MD also said that the Nu 35.14 bn project cost estimated for P 1 in 2006 was a huge underestimation as the 1020 MW Tala had itself been completed at Nu 41 bn in 2006. The MD giving an example of the underestimation said that in the original DPR it was estimated that the 9 meter diameter diversion tunnel of 580 meters would be enough to divert the river to allow for the project construction. He said on the ground the reality was that two 11 meter diameter tunnels with a combined length of 2.7 km was required.
The MD also said that inflation especially in the increasing cost of steel and cement had also played a major factor in increasing the cost of the project.
The increase from the 2006 estimation of 35.14 bn to now the completion cost of Nu 94 bn in 2016 is almost a 300 percent increase in cost of project.
The Bhutanese, however, found that between 2003 and 2012 the cumulative inflation in India was 76.91 percent.
Also in the comparison of prices of steel and cement the PHPA in its presentation had compared 2001 and 2011 prices. PHPA had said that a cement bag that cost Nu 161 per bag in 2001 increased to Nu 253 in 2011. It also said that a metric tonne of steel increased from Nu 18,500 to Nu 44,500.
However, critics have pointed out that comparing 2001 and 2011 prices to justify inflation is inaccurate as the P 1 project cost estimate was made in 2006 and its construction started in 2008.
The Bhutanese, found that on the Whole Sellers Price Index (WPI) of India which is used to measure inflation the price of steel rods in 2005 December was Nu 101.2 which in 2013 had increased to Nu 142.9. On the same scale a 50 kg bag of cement in 2002 was Nu 145.3 and had increased to only Nu 171.9 by 2013.
The MD also gave the example of the Tala project which had increased from its original estimated cost of Nu 14 bn in 1993 to Nu 41 bn in 2007 which was an increase of almost 300 percent.
However, this paper found that this would not be an accurate comparison as the Tala’s price had increased over the period of 14 years while P 1 project cost had been projected to balloon by almost 300 percent in a shorter span of 10 years from the cost estimation in 2006 to its completion in 2016.
On the tariff rate the PHPA MD said that the tariff rate for P 1 would definitely be much higher than that of the Tala project as tariff calculation would be based on the construction costs among others. He said that tariff could even be estimated to go up to even Nu 3.40 per unit which would make the P 1 project a profitable one even after paying all loans.
Ministry of Works and Human Settlement Minister Lyonpo Yeshey Zimba said, “You have to look at the agreement between India and Bhutan. As far as the loan repayment is concerned, it will not be affected much because the power tariffs are based on the cost of construction or building the project.” “If the project cost is more, power costs will also be more,” he said.
He also said the decision to shift the dam was based on technical findings on the ground such as geological studies. “Much studies has been done on it before the dam site was selected,” said the minister.
What the cabinet approved in June 2008
Relocation of P 1 dam site by 1.4 km upstream to a place with 30 meter depth turning a 1095 MW project into a 1200 MW one with only Nu 1.2 bn additional cost to the Nu 35.14 bn cost.
What actually happened in 2013
Dam site found to be 74 meter depth which played a major role apart from inflation in pushing project cost from Nu 35 bn to Nu 94 bn.
Bhutan may have to pay Nu 10 bn every year for 12 years after completion to pay the huge loan.
Project would not be profitable if Bhutan cannot secure a higher tariff rate than Tala.
90 families affected and 70 acres of paddy land flooded.
Critics say better location of dam with same power generation capacity could have been looked for if cabinet had asked for more research and found that actual depth was 74 meters in June 2008.