The importance of the Mangdechu tariff negotiations cannot be understated for Bhutan in setting a precedent for Punatsangchu I and II and also deciding the income for Bhutan’s most important source of domestic revenue.
All that Bhutan is asking for is a fair tariff rate, based on the cost of construction and finance and a return on equity including the the mandatory royalty or free power.
Bhutan’s expectations from the tariff negotiations would still mean competitively priced electricity for India.
Indian policy makers in 2009 itself understood that by going for a higher loan share of 70 percent funding compared to 40 percent in Tala and Chukha, the cost of financing and hence the tariff rate, would be higher.
The project after all has to earn enough to pay back this higher loan component and also ensure a return on equity or revenue.
However, the negotiations while being economically important for Bhutan are equally important for India from the political perspective.
For a long time, hydro watchers, economists and even lay observers in Bhutan were keenly aware that Bhutan’s power export rates to India from Chukha and Tala were the cheapest in the world.
Bhutan was merrily exporting power at Nu 1.80 from Tala even as energy rates in India regularly touched Nu 6 to 7 per unit and even higher.
As research by a Canadian and US University showed, India recovered its investment within nine years from the launch of the Chukha project due to the comparatively lower tariff rates.
Even with this fact, most Bhutanese will not begrudge India given the economic importance of these two projects and the fact that they were financed by 60 percent grant.
However, the ball game is completely different with a much more commercial Mangdechu project with 70 percent loan commitment that Bhutan has to pay back within 15 years, and at the same time earn enough revenue to meet the rapidly growing needs of its citizens.
Given the huge trade imbalance between the two countries- hydropower is the only realistic area where Bhutan can narrow this gap.
Bhutan by pressing its case in the Mangdechu project is not only asking for a fair rate as demanded by a higher financing cost, but it is also a request to be treated on a more equal footing.
New Delhi can choose to accept this request from its closest ally or instead decide that pennies matter more than the pound.
Friendship is always a sweet responsibility, never an opportunity.