Management Control, Financing and Construction award issues leads to end of Kholongchu JV model

The Minister of Economic Affairs (MoEA) Loknath Sharma recently announced in Parliament that the 600 MW Kholongchu Project would no longer happen under the Joint Venture model of 50:50 ownership between Satluj Jal Vidyut Nigam Limited (SJVNL) and Druk Green Power Corporation (DGPC).

The final straw that broke the camel’s back was SJVN not agreeing to award 20 percent of the construction works in the dam and powerhouse to the Construction Development Corporation Limited (CDCL), but there were several other issues plaguing the project.

A source said that SJVN from the beginning had leveraged the fact that the Government of India is paying the 15 percent equity of DGPC and managed to get 50 percent ownership of the project.

This is even though the Companies Act does not allow such foreign investments and as per the law DGPC should be holding 51% and SJVN 49%.

With this the next issue came in the board where there was equal representation of Bhutanese and SJVN representatives with equal voting powers, but with a Bhutanese Chairman with no power to break the deadlock.

However, a source said that more than the board the actual issue lay in the management where SJVN exercised full management control and also control over the funds. The Managing Director, Director Finance and Director Technical were all from SJVN while the Bhutanese Joint Managing Director had no real authority and was more like a figure head there.

This is why the SJVN dominated management took a tough stance on not giving the 20 percent works to CDCL directly, but instead asked CDCL to be a sub-contractor.

Another major issue that cropped up was financing. As per the agreement the project was to get the 70 percent financing on loan. However, the Bhutanese side was not happy with the SJVN’s provision or source for financing which was a high of 9% per annum interest rate which would be the minimum to start with and it would be reviewed every year which means it could go up.

The Bhutanese side felt it had given up so many things like majority control, board control, management control and even financial control and so the final line in the sand became the 20% awarding of works and the loan financing terms.

When these could not be resolved then a decision was made to not go ahead with the JV model.

A source said that this does not mean that the project is being shut down but one option would be to go through an Inter-Governmental bilateral model with improvements from the lessons learnt in the past, and the other option would be for Bhutan to do the project on its own.

In the meantime, Nu 4.5 bn has been spent mostly on roads, bridges and settlements and another Nu 500 or so has to be given to contractors for works.

Background

Kholongchu was first listed as one of the four joint venture projects in the 10,000 MW by 2020 list in 2008.

From 2008 onwards Bhutan and India negotiated to come up with a JV agreement which was finally done in April 2014.

The project’s foundation stone was first laid by Prime Minister Narendra Modi when he undertook his first foreign diplomatic visit to Bhutan in June 16, 2014.

September 2015 saw the start of the pre-construction works like the access road and other building infrastructure which by today have come close to Nu 3 bn.

However, early on problems developed as DGPC’s JV partner Satluj Jal Vidyut Nigam (SJVN) started imposing several demands that went well beyond the Inter-Governmental Agreement for the Joint Venture Projects.

Bhutanese officials at the time requested the support of GoI to resolve the issues first only after which it can sign the Concession Agreement.

Just when these issues were resolved the end of 2016 saw the CBTE guideline from India that restricted the sale of Bhutanese power in India’s prime market and this impacted Kholongchu which as per the JV agreement had to sell 30 percent of its power in precisely this commercial market.

After much discussions a new CBTE guideline’ was issued by the end of 2018 which addressed Bhutan’s concerns and so Bhutan would be able to trade this 30 percent power in India energy exchange.

Another hurdle after this was on selling the 70 percent of the power which was resolved after it was agreed that the 70 percent of the power will be sold based on the inter-governmental model.

The Concession Agreement was signed on 29th June 2020 between the Ministry of Economic Affairs (MoEA) representing the Royal Government of Bhutan and the Kholongchu Hydro Energy Limited (KHEL) in the virtual presence of dignitaries of both countries.

However, after this the issue of awarding 20% of the works to CDCL and financing issues came up.

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