Prime Minister Lyonchhen (Dr) Lotay Tshering

Indian tariff team offers 3.80 to 3.90 per unit but Bhutan wants 4.40 to 4.50 per unit in Mangdechu

Mangdechu tariff rate negotiations critical for 12th plan financing says PM

Final tariff rate likely to be a political decision between the two PMs

Not mincing any words, the Prime Minister, Lyonchhen (Dr) Lotay Tshering during the second Friday meet said that a major chunk of the internal revenue of 12th plan will depend on the Mangdechu tariff rate that Bhutan can get.

“How much tariff rate Mangdechu can generate is the biggest excitement and at the top of my mind,” said the Prime Minister.

He said this in the context of his upcoming December 27 visit to India at the invitation of the Indian Prime Minister Narendra Modi.

The Bhutanese has learnt that seventh round of tariff negotiation between Bhutanese and Indian officials appear to have reached a stalemate of sorts, for now, with the Indian side offering around Nu 3.80 to Nu 3.90 per unit while Bhutan wants Nu 4.40 to Nu 4.50 per unit.

This is an improvement after the third round held in May 2018 where India side offered Nu 3.50 and Bhutan wanted 4.90 per unit, but the current gap is still quite big.

Lyonchhen said that the main priority in his visit to India would be to discuss the Mangdechu tariff issue. He said other important areas would be to discuss the support of India for the 12th plan and also continue the discussions for the Sunkosh project started by the previous government.

Lyonchhen said that even with Bhutan’s projections from the Mangdechu tariff rate, Bhutan still had an internal revenue shortfall or fiscal deficit of Nu 29 bn in the 12th plan.

The fact that the Bhutanese and Indian officials have not been able to agree to a common tariff rate now means that the Mangdechu tariff rate will have to be a political decision taken at the level of the two Prime Ministers.

This follows the precedent of the Tala tariff negotiations where officials from both sides even after two years of negotiations from 2004-2006 could not agree on a common rate.

Finally, a political decision was taken by the two governments where a rate was fixed which was higher than what the Indian side offered but lower than what the Bhutanese side wanted.

The two main reasons that the Bhutanese side is pushing for a certain tariff rate is technical and financial.

The technical reason in simple terms is that Bhutan wants to follow the long established precedent from Chukha and Tala of the cost plus based model that assures enough revenue to pay both the loan and have additional income beyond that.

The main determinant in the cost plus model is the cost of financing which is very high for Bhutan given the Mangdechu project is financed by 70 percent loan and only 30 percent grant.

This should increase the tariff rate as the project under the cost plus model has to generate enough revenue to pay the increased loan and also ensure additional revenue.

This is also in the backdrop of an increased demand for power in India with increasing tariff rates as the Indian economy picks up and the supply side is struggling to keep up.

The Indian side, to bring the tariff rate down, does not want to follow the Tala precedent and has come up with new terms that wants to restrict the return on equity of 15 percent and limit the role of the free or royalty power of 15 percent in calculating the tariff rate.

The Bhutanese side offered the option of lowering the loan interest rate of 10 percent to lower the tariff rate, but the Indian side has not agreed.

The financial reason for Bhutan is that a chunk of the 12th plan revenue projections have been based on getting a good tariff rate for Mangdechu.

Mangdechu project will generate around 3 billion units a year and if Bhutan can secure a Nu 4.50 tariff rate then it can get Nu 13.5 bn a year in gross revenue of which roughly around half will go in loan repayments, but this still leaves around Nu 7 bn a year in revenue which comes to around Nu 35 bn in five years.

The total internal revenue projection of the 12th plan is Nu 218 bn. The revenue projection of Nu 218 bn is a reduced one after additional delays in the Mangdechu and Punatsangchu I and II projects.

A fair tariff rate in Bhutan’s view will improve the trade balance with India which is widening and becoming unsustainable putting pressure on Bhutan’s limited Rupee reserves. It will also mean that Bhutan can take the same grant amount of Nu 45 bn in the 12th plan as in the 11th plan as part of Bhutan’s long proclaimed self-sufficiency goal.

An additional incentive for a political decision on the tariff hike is the very nature of the bilateral project.

The Minister for Economic Affairs Lyonpo Loknath Sharma said, “The Mangdechu project will become the largest source of revenue for the 12th plan and while we want the best rates we don’t want too much as well. We are looking for a friendship rate given that this is a bilateral friendship project.”

The Mangdechu tariff negotiation team from Bhutan consists of the the Secretary of Ministry of Economic Affairs Dasho Yeshi Wangdi, Director of Department of Hydropower Karma P. Dorji, DGPC MD Dasho Chhewang Rinzin, Royal Privy Council member and former BPC MD Dasho Bharat Tamang and a representative from the Ministry of Finance.

The Indian side is represented chiefly by Joint Secretary North, Sudhakar Dalela of the Ministry of External Affairs and Joint Secretary Hydro Archana Agrawal from the Ministry of Power with representation from India’s Central Electricity Authority (CEA).

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