The country’s dependence on a single source of income has many critics vocally worried
Hydropower: The concern that a small landlocked country is too dependent on a single export commodity, electricity, is growing, with critics getting louder that the country is risking its future without diversifying its economy base.
First on the list is the concern on escalating cost in building the mega projects. The cost escalation of the ongoing three hydropower projects will not only entail longer debt service obligation, but also lead to higher tariff, critics warn.
Once the projects are commissioned, the Druk Green Power Corporation (DGPC) will take over the operation and maintenance. This would result in higher generation cost. Currently DGPC sells power to Bhutan Power corporation at Nu 1.39 a unit.
Considering the revised cost of Punatshangchu I and II, and Mangdechu, its generation cost would be around Nu 3.5 a unit, which means adding the BPC’s transmission charges, domestic users will have to at least pay Nu 4 a unit of electricity.
Revising export price is not in the hands of the government, as it is dictated by the power purchase agreement in case of the inter-governmental (IG) projects, where tariffs are fixed in such a way, that only servicing of loans and providing a minimum return on equity are covered (cost plus method).
The power purchase agreement is not in favour of Bhutan, since tariff in power exchange of India was averaging Nu 4 a unit. Export price of Chukha is Nu 2.25 a unit and Nu 1.98 for Tala. Should Bhutan’s power be driven by market price, it would earn an additional revenue of Nu 6.6B a year.
An economist with the government argues that power purchase agreement removes the risk factor and stabilises the price. Should the market dictate the rates, an economist said, sometimes the country may earn as high as Nu 7 a unit, but sometimes it may even fall to 0.5 a unit.
Self reliance or more reliance ?
Beyond revenue and tariff, critics are more concerned that, while hydropower will remain the backbone of the economy, it is not benefiting the economy, especially in helping the private sector grow.
“How have the Bhutanese people and the private sector benefitted from the availability of cheap hydropower in the country so far?” asks the president of the Bhutan Kuen -Nyam party, Sonam Tobgay. “With cheap power available in the country, has the development of Bhutanese-owned industries in the southern border gained momentum on grounds of comparative advantage with potentials to create more jobs for the unemployed and additional revenues for the government?”
Former US ambassador to the Asian Development Bank (ADB), Curtis S Chin, who was recently in the country, said that Bhutan should benefit from the revenue by investing in its people, which means investing to change the mind set of people, encourage entrepreneurship and small businesses. “These would also lead to more government revenue through increased tax,” he said.
A columnist for the Wall Street Journal, Curtis said that the problem with Bhutan’s hydropower is that there was only one customer and price was controlled. “It may be serving the buyer’s interest, but how does it serve Bhutan’s purpose?”
Sonam Tobgay, through a press release, said that the hydropower development agreements should have policies and terms to create jobs for our youth, not necessarily at production sites or during the construction period, but whether an overall development agenda was in place to develop communities running a vibrant local economy as a spillover effect along the valley floors.
On the cost escalation, DGPC’s managing director, Dasho Chhewang Rinzin, said major cost escalations in the hydropower projects were on account of the Detailed Project Report (DPR) cost estimates.
He said the price variations, cost of financing, interest accrued during the long gestation period and contingencies are not provided in those DPRs. Cost escalations, he added, were also on account of the poor Himalayan geology. “But generally, Bhutan has been one of the few countries that has managed to complete hydropower projects without too much time delay,” he said.
All is not grim as pointed out by critics. The managing director said, even at the escalated projects costs, energy from these projects remains competitive in the market, because of the power purchase agreement and the cost plus methodology.
Another area critics are worried is debt obligation. Bhutan’s debt obligation increases as the hydropower financing shifts from 60:40 debt equity ratio to 70:30, and now the joint ventures.
Unlike the inter-governmental model where Bhutan fully owns the project, in a joint venture Bhutan’s ownership over the project is only 50 percent, and this would directly link with project management and lesser dividends for the government.
Grant component of building mutual beneficial projects changed from 60 percent grant and 40 percent loan component, bearing an interest rate of 5 percent to 30 percent grant and 70 percent loan at an interest of 10 percent today.
Figures from the World Bank stated that the construction phase of these projects results in significant financial inflows into the economy outside the budget. The associated financial inflows, as forecasted, could reach as much as Nu 50B, equivalent to a third of GDP in 2016.
However, most of the spending translates into imports. Local spending, albeit smaller, is still high, picking up at Nu 11B, or 6 percent of GDP in 2016.
The BKP also questioned to what degree the country was prepared to pay back its debt. At the end the 11th five-year plan, it is estimated Bhutan’s debt to GDP ration is projected at 111 percent, with increasing disbursements of ongoing and upcoming projects.
While many argue that hydropower sector drives a jobless growth without much benefits to society, studies reveals that it builds a value chain by powering energy intensive industries.
Last year, three projects employed 1,694 national and awarded work to some 1,205 Bhutanese contractors.
Meanwhile, Bhutan’s hydropower sector is experiencing a variegated outlook amidst all the projections that accelerated hydropower development would bring self-reliance.
The government’s move was criticised more often as “putting all eggs in one basket” and “Dutch disease,”
“We don’t have too many eggs nor do we have the luxury of having too many baskets,” Dasho Chhewang Rinzin said. “We need to make the best use of what we have.”
He said handling the sector well would tackle any risk that might entail.