Human Capacity Trumps Hydro Power … Everytime!-Part 2  

Pre and Post-Commissioning Gains

Indeed, people are mostly correct (mostly being the operative word) in assuming that hydropower means economic growth for Bhutan. But, where many believe that it is earnings from power sales that drive the growth surges, the real value addition takes place much earlier on. This theory is one of pre-commissioning rather than post-commissioning gains. Don’t get me wrong. Electricity revenue is essential for sustaining Bhutan’s economy. The case here is simply that – ‘construction activities for hydropower development are more likely to contribute to the high rates of growth witnessed in our economy’. This assertion is not based on any research or studies in Bhutan, mainly since none exist (to date). It is perhaps one reason why skeptics think that I am ‘splitting too many hairs’. “It’s the same difference,” they snap. Their irritation being – so long as hydropower overall has a significant and positive impact on the economy, it matters little which specific part of the development phase contributes to its change. I beg to differ.

My argument is based on two simple yet reasonably self-explanatory observations. The first is a not so scientific ‘eyeball analysis’ of Exhibit A. The second is an as-of-yet untested theory of a ‘response lag’ or the time that the impact of building a hydroplant is felt on the local economy.

First, the eyeball analysis: with data from the NSB and DGPC, it can be observed in Exhibit A that three of the highest growth spikes in 1987, 2002 and 2007 occur within a year after CHP, KHP/BHP and THP are first commissioned. There is also the unexplained surge of 22.7% in 1997. The main literature on Bhutan’s development, Gross National Happiness Commission’s (GNHC) Five-Year Plan (FYP) documents, is silent on this anomaly. An initial guess is that the government went into a spending spree to wrap-up the Seventh Five-Year Plan (1992-1997) or perhaps, Bhutan National Bank Limited (BNBL) – established in 1997 – had a very early and significant effect on growth. The best explanation again, lies in hydropower. It is possible that budget support (from India) arrived early for mobilization efforts towards THP, scheduled to begin construction in 1998. These are only deductions of course. Readers are invited to make their own educated guesses.

Apart from this outlier, there is sufficient proof to support the general belief that hydropower development precedes economic growth. What isn’t so evident or realistic though – if we believed that post-commissioning power revenues drove growth – is how quickly its impact materializes in the economy. National accounts record such gains within a year of a hydroplant’s initial commissioning. This ‘super-quick transmission of earnings to growth’ seems implausible when we consider the following: 1) hydroplants are commissioned in phases (see Exhibit A) so export earnings may not be as full or as immediate as exhibited in growth data; 2) hydroplants require a significant ‘lead time’ from when they’re commissioned to a fully operational status thus nullifying the possibility of full financial gains so early on; 3) even if earnings are realized early, precious little is likely to trickle into the local economy with a large chunk for repayment of debt flowing straight back to India; and importantly 4) if electricity export earnings are relatively stable and is presumed to drive the high growth rates, what explains the precipitous drops right after? Growth in the after-years is often lower than those directly preceding the commissioning of a hydroplant.

This brings us to the second theory of a ‘response lag’ or specifically that – investments made during the pre-commissioning phase or construction stages of hydroplants drive our economic booms. This is also based on observable trends. The first and easiest of which is the ‘gestation period’ or ‘gradual accumulation of investments and transmission to growth’ theory. There is a sustained and concerted level of investment in the economy at least 9 – 12 years before the start of any hydroplant as noted by the DGPC. These are investments in basic infrastructure, mainly “access to roads, schools, hospitals and residential colonies”. In Chukha’s case, this period spanned 4 – 5 years (1974-1978/79) before any electro-mechanical or civil works began. The main construction works took another 7 years before the hydroplant’s first unit was operational in 1986. Basic infrastructure for Tala took 2 years (1997-1999) and main works, another 7 years before its operations began in 2006. The sheer volume of economic activities carried out in these ‘build-up periods’ is reasonable ground to believe that they are gradually leading up to a growth surge. Now, how and why the gains are reflected abruptly in one particular year rather than distributed uniformly, gradually or in any rational trend across the entire development period, only our real sector and national accounts experts can say.

Argument two is about ‘money’, namely the staggering amounts of Rupees (INR) pumped into our economy by the Government of India (GOI)during a hydroplant’s build-up phase. The final completion cost of CHP in 1986 was estimated at Nu. 2.5 billion. Note that Bhutan’s GDP that year was only Nu. 2.8 billion. If one were to assume that the GOI funds came in 12 equal tranches (i.e. the 12 years build-up period) of Nu. 200 million each; yearly inflows make up, on average, 12% of GDP every year from 1980 to 1986. Tala was completed for Nu. 41.3 billion in 2006. That year’s GDP was Nu. 39.6 billion. Again, if we assume the funds came in 9 steady and equal installments from 1997 to 2006 of Nu. 4.6 billion each; the average annual contribution to GDP is 20%. This is a lot of growth funded by an external source. It must be emphasized that most of the funds were free. The funding modality of both CHP and THP was 60% grants and 40% loans, the latter at concessional rates from India. Thus, ifwe juxtaposed this account of vast and free funds in the pre-commissioning period against anearlier statement that ‘most hydropower sales revenue go towards settling debt and very little actually trickle down’, it is not hard to imagine where the value addition to our economy is coming from.

The third argument is construction. Specifically, this sector’s contribution to the economy in the years leading up to (and after) a hydroplant. At this point of the conversation, the normal interjection is – “You think construction is more important than hydropower?” or, “You know that there is no construction without hydropower right?” No, and yes. Hydropower is the single-most important sector of Bhutan’s economy. It is more important than say, Fiji Water is to Fiji. Any decent textbook on Bhutan Economy 101 must cover hydropower, its benefits, ‘Dutch Disease’, etcetera. And yes, without hydropower, there isn’t much construction. But, there is also very little else. It is not only the most important but also the primordial sector of our economy. The causality and direction for us is well and truly established: hydropower is to everything else.

The case though, without ‘flogging the dead horse’ even more, is that – investments in hydropower construction is a likelier addition to growth than power revenue. The construction sector contributed, on average, 13.6% to GDP in the 5 years prior to Chukha HP. In the 5 years before Tala, it averaged 17.4%. This sector tapers off once a plant became operational. Its input however, remains significant at over 8% of GDP in the 5 years after CHP and 13.5% after THP was commissioned. One can assume that newly created wealth and availability of INR from investments in hydro-capital are leading to other construction activities. If we extended our horizon again by 34 years from 1980 to 2013, ‘Electricity (and Water)’ contributed, on average, just 9.4% to annual GDP while ‘Construction’ contributed 12.5% as per the NSB’s records.

Opinion by

P.W Dorji

 

 

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