The Royal Audit Authority (RAA) report on Public Debt Management from 2008-2013 while acknowledging the benefit of the hydro projects in Bhutan has also pointed out several risks posed with the huge debt concentrated in this single economic activity.
The report says that the debt structure of last five years indicated that the major portion of total debt consist of debts availed for construction of hydro projects. As a result, the debt burden indicators had consistently exceeded the indicative Maastricht criteria of 60% of GDP.
In 2008-2009 hydropower debt was 66.91% of total debt while in 2011 and 2012 it was 65.75% of total debt.
The report says that the predominant exposure and risk was concentrated in hydropower which the report says may place the country in a vulnerable position due to unforeseen contingencies like hydrological, revenue, market, geo-technical, construction, cost and time overruns risks that could have an adverse affect on the stability of the economy.
In the 2012-13 financial year hydropower debt stood at Nu 54.527 bn of which around more than 80% was owed in rupee loans from the government of India.
The report said that unlike other funded projects, the construction of hydro projects usually took longer time making it more susceptible to time and cost overrun risks. The report says that historically that the agreed cost and construction period differed with substantial cost and time overruns.
It says that there was a cost overrun of 119.60% in Kurichu and 207% in Tala Hydropower plant. It says the scenario was repeated in Punatsangchu I which increased to Nu 94 bn from an initial cost of Nu 35 bn. It says even this increase in cost does not take into the impact inflation will have in the future.
The time and cost overrun will have multiple impacts like loss of revenue, higher generation cost, increased loan and interest burden and consequential increase in repayment obligations, according to the report. It also says that from the donor and lender point of view it would entail increased grant, provision of additional loan and buying energy at higher tariff.
Pointing out the increased debt component in the financing of hydropower projects, the report says that while Kurichu project and Tala project were built at 60% grant and 40% loan it changed to 40% grant and 60% loan for Punatsangchu I.
This from 2011 has changed to 30% grant and 70% loan for projects like P II and Mangdechu and others. The report says that this indicates that the country’s hydropower debt is expected to increase in the near future.
It says that the rate of interest on rupee loans for hydropower is also higher at 10 percent which would entail additional interest burden.
The report says that hydro power debts are regarded as self-sustaining and commercially viable on the premise that investment in hydropower would generate its own fund to service the debt. However, despite the validity of this assumption, there has been increasing hydropower debt service stress built mainly on account of the way the hydropower export earnings are utilized in the economy.
The report said that it takes at least 55 days to convert the energy generated into cash wherein raising of invoice takes 10 days and thereafter settlement of invoice takes more than 45 days.
It says that while no interest is charged for settlement of bills within 45 days after raising of invoice, the interest on hydropower loan continues to accumulate. The report says that the repayment schedule for hydropower semi-annual which falls on 15 June and 15 December for Tala Hydroelectric project. The report points out that the longer repayment intervals, therefore, entails higher interest burden. It also says that since the hydropower revenue was immediately used to meet other rupee commitments the RMA had to resort to taking overdraft facilities from Indian banks and also selling USD 200 mn in 2013.
While pointing out that the export market in India is undoubtedly a guaranteed market the report says that another crucial consideration is being able to sell the energy at market prices or at least at a reasonable price. The report says that this warrants the government in exploring other viable option or market for export of energy.
According to the report the power purchase agreement between Power Trading Corporation of India and the Bhutan government stipulated that only the surplus energy that is in excess of requirements within Bhutan will be exported. The report raises the point that this existing pricing mechanism provides limited scope for taking advantage of surge in market prices. It says that Energy tariff remains static for years despite impact of double digit inflationary trend and consequential erosion in the purchasing power of money.
In the Basochu project financed by the government of Austria the report found that on account of the depreciation of the Rupee and by consequence the Ngultrum against the Euro the additional cost implication as of June 2013 worked out to Nu 986.16 mn.
The report says that hydropower debt is subject to unforeseen hydrological risk (flood, climate change, water flow etc), regardless of assumptions of commercial viability and self-sustaining characteristics. It says that under such circumstances Bhutan should have back up plans especially for debt servicing like creating reserves created specifically to mitigate such risk.
It says that since repayment of loans is dependent on revenue generation for hydropower plants, hydrological risk resulting from variations in water levels would lead to loss of generation and revenue.
Pointing out the low generation during winter the report says that power has to be instead imported from India creating a high cost of energy.
The report says that a back up strategy for mitigating loss arising from occurrence of unforeseen hydrological disasters may be necessary. It says that the absence of such a backup plan could prove to be costly if such eventualities become a reality.