Punatsangchu I and II costs escalate by Nu 48 bn, inflation the cause

As construction on the P-I site progress, the cost shoots up by the day.(Photo courtesy: Indian Embassy

As if the rupee crisis was not enough already, Bhutan will have to  gear up to avail more rupee loans than originally estimated for its upcoming 10,000 MW projects.

The cost of the 1,200 MW, Punatsangchu I and 1,000 MW Punatsangchu II project has increased from its original estimate of Nu 72 bn to more than Nu 120 bn by the time it is completed in 2017. This is an increase of Nu 48 bn.

The Nu 35 bn Punatsangchu I project cost estimate made in 2006 has been revised to a whopping Nu 66 bn, an increase of Nu 31 bn.

Similarly the Nu 37 bn Punatsangchu II project cost estimate made in 2009 has been also revised to an astronomical Nu 54 bn by 2017, an increase by Nu 17 bn.

This increase would lead to Bhutan taking much bigger loans for the two projects from India. This is because around 60% of the budget for P-I and 70% of the budget for P-II come from loans taken by Bhutan from India.

The remaining 40% and 30% grants respectively will be availed from India.

The ultimate result will be ballooning of Bhutan’ loans on the two projects to Nu 77.41 bn up from the earlier Nu 47 billion loan.

These kinds of cost revisions are expected to be there in all other projects which could push up the Nu 500 bn for 10,000 MW by 40% to 50% at Nu 750 billion.

Given the overall 70% loan and 30% grant arrangement for nearly all hydro projects, the earlier loan component estimated at Nu 350 bn will now increase to around Nu 525 bn by 2020.

The costs and loans will further escalate if the projects are not completed by the time.

A concern for many is that the interest payment on these large loans could reduce the benefits of large rupee revenue from India.

“In any hydropower project the initial estimated cost will be much lower than when the project is finally completed due to factors like inflation and also hidden surprises in project implementation over the years,” said R.N Khazanchi, the Managing Director of the Punatsangchu Hydroelectric Project Authority (PHPA).

Giving the example of a building construction he said that originally the budget may be Nu 10 million, but three years later the actual cost could be Nu 15 million due to inflation and unforeseen circumstances.

He said that the only way for the project to be completed at the first estimated cost would be to build it within a month which would not be possible.

He said that the revised completion cost for P I and P II would be presented to the two governments by the end of 2012 and 2013 respectively.

“The Department of Energy from Bhutan and the Central Electricity Authority from India will both examine the revised figures and give their comments and suggestions only after which it can be finalized,” said Khazanchi.

The revised rates for the projects have been prepared by the PHPA management using inflation data and charts and making provisions for geological and other surprises.

In any hydropower project out of the 100% costs, around 30% is for construction services and wages, 30% for equipment and set up, 15% for cement, 15% for steel and 10% for fuel and transportation.

Khazanchi said that when the project takes off in the first year only around 15% can be spent for advances and procurement leaving 85% of the budget to be spent for the coming years when inflation would  shoot  up.

He gave the example of the 1020 MW Tala project which was originally projected at a cost of Nu 14.08 bn in December 1993 but by its completion in 2007 the price had shot up to Nu 41 bn – almost a 300% increase.

P I was awarded in three packages which were the dam at Nu 12.45 bn to Larson and Turbo, power house at Nu 6.68 bn to Hindustan Construction Company (HCC) and head race tunnel at Nu 4 bn to Gammon.

For P II, the dam construction was awarded at Nu 12.24 bn to Jai Prakash, power house at Nu 8.55 bn also to Jai Prakash and head race tunnel at Nu 3.98 bn to Gammon.

The cost escalation would also mean that the actual amount collected by these companies after the project is completed would be much higher than the original quotes.

On the issue of budgetary and financing concerns with such cost escalations, Khazanchi said that as per his understanding a commitment to 10,000 MW by 2020 had been made by the Indian Government which would have also foreseen such cost increases.

For Bhutan, though such revisions will mean more rupee loans, the silver lining is that the electricity tariff rates for these projects would be higher as higher tariff is linked to high construction cost and more loan component.





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  1. That is what happens when you senseless pay a huge salaries and perks to the employees. Another effect of this lucrative pay scale is the resignation and movement of talented civil servants to these projects. DPT where are you? 

  2. i don’t get it. are we talking about inflation in bhutan or inflation in india? indian inflation has been more steady than ours and it should have been included in the projections when making the budget plan itself. what’s this, it sounds like they are surprised to be hit by inflation.

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