State ownership of hydro projects to ensure equity and prevent ‘hydro-fronting’

The National Council in one of its eight recommendations on the review of the hydropower sector recommended that hydropower projects be owned only by the state and not private companies and individuals.

This NC recommendation comes in the backdrop of increasing lobbying over the years by some private companies, both Bhutanese and foreign, to construct and own hydro projects in Bhutan.

According to reliable sources none of the interested local private companies have the capacity or resources for doing such projects. Even in case of Foreign Direct Investment, Bhutanese companies do not even have resources to match the minimum 26 percent equity required for such investments.

As a result there is a strong concern at various levels that the entry of domestic private players and their foreign partners would lead to fronting or ‘hydro-fronting’ where local companies are owners only on paper but in reality just collect a commission while the real benefits flow to foreign companies.

Observers point to the Palm Oil and even many other existing factories in the Pasakha where the real owners were or are across the border, which can be easily demonstrated by a study of the financial transactions where a large bulk of the profits never make it back into Bhutan.

Recent Anti Corruption Commission (ACC) investigations in Phuntsholing have shown how Indians operating on fronting licenses have caused billions worth of INR shortage in Bhutan by creating fake import bills etc.

The strong presence of fronting in the industrial sector of Bhutan apart from ensuring lack of genuine strong industrial development has also lead to the outflow of INR and convertible currency over the years. The real beneficiaries have been real owners across the border who make huge profits based on cheap electricity and tax differences and give only a small commission to local fronting partners.

A senior Member of Parliament, on the condition of anonymity, said that the issue is also about inter-generational equity. He said that the rivers and mountains belong to all Bhutanese and if a few business houses were allowed to own hydro projects then it would lead to massive inequalities over generations in the future.

The NC, in its discussions talked about amending the Bhutan Sustainable Hydropower Development Policy and the Bhutan Electricity Act 2001 to ensure state ownership of hydropower. Both the policy and the Act allows for private ownership of projects.

NC MP Jigmi Rinzin from Pemagatshel and NC MP Tempa Wangdi from Lhuentse in a separate interview with The Bhutanese said that it would be better to have state ownership of hydro projects.

They said that even in case of joint ventures, those not reverting back after 30 years should pay an increased royalty of 18 percent.

Eminent NC member Dasho Tashi Wangyel said that when it comes to hydropower there is a very clear Constitutional clause that talks of state ownership.

Article 1 section 12 says, “The rights over mineral resources, rivers, lakes and forests shall vest in the State and are the properties of the State, which shall be regulated by law.”

During the discussions NC Pema Tenzin from Chukha also cautioned against allowing in private owners giving the example of advice from neighboring Nepal to not allow private players.

The NC Chair Dasho (Dr) Sonam King reminded the house on how His Majesty the King had advised the nation about how hydropower belongs to the nation and the people.

In the 106th National Day address His Majesty the King said that hydropower does not belong to one or people but it belongs to the people.

In the 107th National Day address in Trashigang His Majesty the King again advised that hydropower projects belong to the people. His Majesty again advised that it cannot fall into the hands of one or two people. His Majesty said that it should be taken care of and kept for the welfare of the future generations of Bhutanese as well.

Internationally the top five producers of hydropower by ranking are China, Canada, Brazil, USA and Russia where most of the hydro projects are still owned by the state.

In the case of Canada the early inefficient, corrupt and overbilling private hydro companies had to be taken over by a state created company Hydro-Quebec on the popular demands of the people. The company now generates almost all of Canada’s hydropower and meet’s 60 percent of its power needs providing affordable and reliable power to the country.

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