Hydropower Development Policy and Programmes Report as on... · Development of hydropower in Bhutan began in the 1st Five Year Plan (1961-66) with the commissioning of the first hydel

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Report to the 16th Session of the

National Council on

Hydropower Development Policy and

Programmes

by

Ad hoc Committee

(27th November 2015)

Sangay Khandu, Gasa Dzongkhag – Chairman

Tempa Dorji, Lhuentse Dzongkhag – Deputy Chairman

Jigmi Rinzin, Pemagatshel Dzongkhag – Member

Kamal Bdr. Gurung, Tsirang Dzongkhang - Member

Tharchen, Trongsa Dzongkhag – Member

Tshewang Norbu, Staff – Committee Secretary

Sangay Tshering, Staff- Research Officer

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His Majesty’s Address to the Nation (December 17, 2014)

“Hydropower is considered as our nation‟s most

precious resource that belongs to all the people. Our

focus has been to establish as many hydropower

projects as possible to generate enough revenue to

become self-reliant. With the development of our society

and its needs, revenues from hydropower alone are not

sufficient to finance them.

The budget for the 9th five-year plan was Nu. 70 billion, and one hydropower

project was initiated during that time. During the 10th five-year plan, the budget

increased by over 100% to Nu. 146 billion, and 4 hydropower projects were

initiated. With the 11th five-year plan, we have a budget of more than Nu. 213

billion, and besides the Kholongchu project, feasibility for 4 more hydropower

projects are being considered. This means in the near future, we will be tasked

with the implementation of 9 hydropower projects, which is a heavy

responsibility for the government.

It is good to be ambitious. From one standpoint, more is better and having

something is better than not having anything at all. But we must also realize that

increased workload compounds associated risks and possible failures. We must

ask ourselves, „are we willing and able to take on this responsibility? Can our

financial resources be matched by our human capital?”

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Table of Content

1. Background ......................................................................................................................................... 6

2. Introduction ......................................................................................................................................... 6

2.1 Objectives ....................................................................................................................................... 7

2.2. Methodology ................................................................................................................................. 7

2.3 Methods .......................................................................................................................................... 9

3. Sustainable Hydropower Development ....................................................................................... 9

3.1 Review of policy and legal frameworks ................................................................................. 9

3.1.1 General Policies ................................................................................................................ 9

3.1.2 Hydropower related policies ....................................................................................... 15

3.1.3 Resettlement and compensation in hydropower development projects ...... 18

3.2. Institutional mapping and analysis of sectoral decision-making set up ............... 19

3.2.1 Institutional mapping .................................................................................................... 19

3.2.2 Institutional arrangements of the hydropower sector ......................................... 20

3.2.3 Linkages between hydropower planning and related plans .................................. 20

4. Hydropower Development Process .............................................................................................. 21

4.1 Hydropower Project Planning/Implementation Cycle .................................................. 21

4.2 Stages in the DPR Preparation: .......................................................................................... 22

4.3 Project Implementation .......................................................................................................... 24

4.4 Cost Escalations: .................................................................................................................... 25

5. Operational decision-making set-up and procedure of hydropower development

projects ..................................................................................................................................................... 27

6. Challenges and Opportunities .................................................................................................. 27

6.1 Challenges ............................................................................................................................... 27

6.2 Opportunities ......................................................................................................................... 33

7. Recommendations ......................................................................................................................... 36

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List of Tables

Table 1: Overview of the policies and legal frameworks reviewed ........................................... 8

Table 2: Costs of HPPs (All Nu. in millions) .................................................................................. 26

Table 3: Trend of electricity revenue ............................................................................................... 28

Table 4: Hydropower debt, fund disbursement and GDP - 2008-2015 .............................. 31

Table 5: Assessment of loan servicing capacity: Tala Hydro Plant ....................................... 35

List of Figures

Figure 1: Basis for selection of the projects ................................................................................. 21

Figure 2: Hydropower project planning cycle ................................................................................ 22

Figure 3: Diagram of DPR process .................................................................................................... 23

Figure 4: Work flow of project implementation .............................................................................. 24

Figure 5: Cost escalation factors...................................................................................................... 25

Figure 6: Operational decision-making set-up ............................................................................... 27

Figure 7: Graphical presentation of the trend in electricity revenue ....................................... 28

Figure 8: Hydropower debt, fund disbursement and GDP trend ............................................. 32

Figure 9: Hydropower debt, fund disbursement and GDP trend ............................................. 32

Table 5: Assessment of loan servicing capacity: Tala Hydro Plant......................................... 35

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ABBREVIATION

BEA Bhutan Electricity Authority

BSHDP Bhutan Sustainable Hydropower Development Policy

CA Concession agreement

DGPC Druk Green Power Corporation

DHI Druk Holding and Investments

DHPS Department of Hydropower and Power Systems

DPR Detailed Project Report

EIA Environmental Impact Assessment

EJG Empowered Joint Group

FYP Five Year Plan

GLOF Glacier Lake Outburst Flood

GNHC Gross National Happiness Commission

GoI Government of India

HPP Hydropower Project

ISEIA Initial Social & Environmental Impact Assessment

MoEA Ministry of Economic Affairs

NEPA National Environment Protection Act of Bhutan

RGoB Royal Government of Bhutan

NEC National Environment Commission

NHPC National Hydropower Corporation

PAVA Property Assessment and Valuation Agency

RS Reconnaissance Study

SIA Strategic Impact Assessment

WAPCOS Water and Power Consultancy Services

SAARC South Asia Association for Regional Co-operations

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1. Background .

The ad hoc committee on Hydropower Studies undertook a review of Bhutan

Sustainable Hydropower Development Policy 2008. The committee was constituted

during the 18th plenary of the House in August 2014 as an outcome of the meeting in

Paro. The decision of the House to constitute an ad-hoc committee was preceded by a

series of concerns expressed by the House. The National Council (during its 7th

session) while discussing the Annual Anticorruption Commission Report 2010-2011,

recommended to the Government the need to make the workings of the hydropower

sector more transparent to curb corruption and also to engage more Bhutanese in

constructions works. The National Council discussed the need to review electricity

tariff for exports. This was even more relevant to some hydropower projects where

tariff revision was overdue. Therefore, during its 9th session in 2012, the issue was

taken up in light of rupee crunch discussions as an additional recommendation.

During its 11th session in 2013, the National Council took up problems related to

township development in relation to hydropower projects. Furthermore, the Council –

during its 12th session in January 2014 – questioned the Government on both delays

and cost escalation in the Punatsangchu I hydropower project.

The Government was once again questioned on the Punatsangchu I hydropower

project by the Council; this time, the concern was regarding adverse effects and

disturbances on structures and communities resulting from blast works. Likewise,

the National Council resolved to task the National Resources and Environment

Committee to review the Sustainable Hydropower Development Policy 2008 and

related issues during the 13th session. Following a meeting in Paro, the National

Council during its 18th plenary in August 2014 constituted an ad hoc committee and

referred the matter of Sustainable Hydropower Development Policy 2008 for review.

The Natural Resources and Environment Committee was subsumed under the ad hoc

committee as it was already involved in the review of the Mining and Mineral Policy

during the time. Accordingly, the ad hoc committee presented its interim review

report during the 15th session of the National Council.

2. Introduction

Development of hydropower in Bhutan began in the 1st Five Year Plan (1961-66) with

the commissioning of the first hydel in the country in 1967 with the support of the

Government of India. Over the years, the cooperation in hydropower development has

come to be recognized as the bedrock of Indo-Bhutan relations with mutual benefit.

The contribution of the sector dominates all other investments and, therefore, plays a

vital role in the economy of the country. Studies have shown that Bhutan has

hydropower potential of 30,000 MW and 23,760 MW as techno-economically viable.

Around 1615 MW of hydropower has been harnessed and an additional 3658 MW is

under construction. The 11th Five Year Plan has identified hydropower for accelerated

development which includes a target of 10,000 MW, construction transmission lines

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and rural electrification activities as energy infrastructure under the strategic

infrastructure development programme.

While hydropower development is important, the time taken to plan and develop

hydropower can be looked at as a loss of resource; the longer the time taken, the

bigger the loss. This is because unlike other resources, the rivers continually flow

away irrespective of whether it is developed to harvest hydropower or not. Therefore,

timely decisions are very critical in order to reap optimal benefits from it.

Gaps in policy, planning, monitoring, implementation and delays in project execution

resulting into huge cost escalations are serious concerns. As stated earlier, the

significance of the sector to the Bhutanese economy further draws attention to the

vulnerability and its consequences. These concerns have led to the study that the

committee now undertakes, the objective of which is to identify those gaps and submit

recommendations. The report is an outcome of reviewing all existing policies and legal

frameworks relating to hydropower development in the country.

2.1 Objectives

The objectives of this policy review and analysis are as follows:

To identify the obstacles and opportunities which exist in the current policy, legal and organizational frameworks that regulate hydropower planning, development and management.

To be in a position to make recommendation(s) on how the existing policy, legal and organizational frameworks can support or hinder sustainable hydropower development.

2.2. Methodology

The overall analysis of this report comprises of three elements:

Review of policy and legal frameworks;

Institutional mapping; and

Review of operational procedures with regard to sustainable hydropower development.

The committee has summarized and reviewed national policies and legal frameworks related to hydropower. Table 1 gives an overview of the reviewed policies and legal frameworks.

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Table 1: Overview of the policies and legal frameworks reviewed

Sl no.

Laws and Policies

1 Electricity Act of Bhutan, 2001

2 Land Act of Bhutan, 2007

3 Water Act of Bhutan, 2011

4 Environmental Assessment Act of Bhutan, 2000

5 National Environment Protection Act of Bhutan, 2007

6 Labour and Employment Act of Bhutan, 2007

7 SAARC Framework Agreement for Energy Cooperation (Electricity)

8 Bhutan Sustainable Hydropower Development Policy 2008

9 Bhutan Renewable Energy Policy

10 Economic Development Policy of the Kingdom of Bhutan 2010

11 Foreign Direct Investment Policy, 2010

12 Memorandum of Understandings (MoUs) with GoI

13 Copy of a DPR and TDR

14 11th FYP document

15 Government’s annual reports to Parliament

16 Bhutan 2020: A Vision for Peace, Prosperity and Happiness

17 Policy documents on REAP & RISE

18 National Employment Policy 2013

The committee in its task of reviewing hydropower development in the country reviewed existing laws, policies and implementation processes. It has been observed that there are apparent gaps in laws, policies and implementation. These can be attributed to a sectoral approach to policy formulation and indicates poor integration because each policy has been defined and formulated based on a different set of sectoral rationales and variables not necessarily linked to each other. It is also noted that while there is generally a wide consensus that hydropower development is essential for the country, this thinking has not yet translated into tangible benefits in other sectors as desired. It also notes concern of inadequate involvement of Parliament in decision-making related to hydropower development in the country. While the plan and budgetary documents show some aspects of spending in the hydropower sector, much remains to be desired in terms of reporting to Parliament in light of the size of budget outlay and its impact on the economy. This concern was raised and discussed during the 5th session of the 2nd Parliament and, consequently, it was decided that budget and appropriation bill would work towards a more inclusive approach to hydropower development plans.

Recognizing the above observations, as part of the review, an institutional and operational mapping exercise was carried out to identify and address those legislative, policy and procedural gaps.

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2.3 Methods

Research methods include secondary data analysis (legal documents, policy reports and agreements); correspondence with hydropower projects, hydropower site visits and interviews with government officials from relevant agencies as well as other relevant stakeholders.

3. Sustainable Hydropower Development

3.1 Review of policy and legal frameworks

The review includes areas concerning sustainable hydropower development, water, environment, resettlement, compensation and local development plans and policies in hydropower development. 3.1.1 General Policies

(a) 11th Five Year Plan

The 11th FYP sets out Self-Reliance and Inclusive Green Socio-Economic

Development as its objective and identifies 3 thrust areas of (i) inclusive social

development, (ii) accelerated green economic development and (iii) strategic

infrastructure development. Under the strategic infrastructure development area,

accelerated hydropower development of 10,000 MW, transmission lines and

continuation of the rural electrification initiative have been identified within the energy

infrastructure.

The Annual Report 2014 of the Government to Parliament identified hydropower sector

as one of the five jewels of the economy, and in the latest report by the Prime Minister,

emphasis was laid on key issues in the sector as follows:

„While we will continue to develop this sector, there is a need to

move beyond simply generating and selling power. We must invest

and build our capacity to become leading experts and a knowledge

centre for hydropower development in our own country, in the

region and globally…

…I assure the Nation that the government will continue to ensure

that the development of the hydropower is in our national interest

and benefits first and foremost the people of Bhutan. We will

continue to actively encourage the building of domestic national

capacity to undertake construction of power projects and take a

lead role in the supply of goods and services to the hydropower

projects.‟– Prime Minister of Bhutan, June 16, 2015, Annual Report of the

Government to the Parliament

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It clearly indicates plans and priority of the Government to continue with hydropower

development in country. It further sets out a direction into development of upstream

and downstream value chain in the hydropower development.

The BSHDP 2008 envisioned an installed capacity of at least 10,000 MW by 2020.

However, several reports in the media on delay in project execution, discussions in

Parliament and statements made by the government indicate failure to achieve the set

target. The committee also observed that the reasons behind the failure as below:

1. Inability of the government to implement financing options set out in the

sustainable hydropower development policy.

2. Inability of the government to avoid delays in decision making processes at

negotiation, approval and implementation stages.

(b) Economic Development Policy - Royalty energy

The economic development policy provision on treatment of royalty energy differs from the sustainable hydropower development policy. While the latter requires royalty energy of 12-18% (12% for the first 12 years and the remaining concession period 18%), the former requires an average of 15% throughout the project concession period.

The hydropower sector outlay is very large. It also makes up for a significant part of

public expenditure and therefore, development of businesses and industries around

projects hold opportunities. This has been stated by the Prime Minister in Parliament.

Hydropower projects continue to import even basic necessities like food grain and

vegetables. The impact of hydropower development on overall development needs to be

acknowledged and accorded value in the national planning process. GNHC needs to

consider impact of hydropower development on local development plans and work

accordingly. This trend needs to be reversed through better alignment of local

economy with projects from the inception stage till completion.

(c) SAARC Framework Agreement for Energy Cooperation (Electricity)

After the Government signed the SAARC Framework Agreement for Energy

Cooperation (Electricity), it was ratified during the 5th session of the National Assembly

and ratified in the National Council in its current session (16th session). The

instrument is expected to enable cross-border trade of electricity on voluntary basis

subject to laws of respective countries.

To achieve the objectives of the agreement, Government should endeavor to expedite

the process to implement provisions of the agreement to maximize benefits for Bhutan.

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(d) Electricity Act of Bhutan 2001

Export tariff setting and role of the Bhutan Electricity Authority

Section 14 - Tariff regulation

14.1 The authority may regulate:

(iv) tariffs for generation not regulated by power purchase agreement

Existing law section 14.1(iv) excludes involvement of the BEA in setting tariff for

export of electricity covered under power purchase and concession agreements. There

is need for more transparency in tariff setting for electricity export and this could be

achieved by considering involvement of the BEA where an independent tariff

calculation could be carried out by it in addition to current practice.

Policymaker and regulator

The electricity sector comprises state owned enterprises, creating monopoly and giving

control of pricing in the domestic sector. In order to protect consumers, the

independent role of the regulator becomes very significant. The current law not only

gives too much authority to the Minister but also mixes up functions of the policy

maker and the regulator as seen under section 17.

Section 17 – Powers and functions of the Minister:

17.1 The powers and function of the Minister under this Act are:

i) to determine general policies, targets and strategies of the electricity

industry operation;

ii) to approve power system expansion plans;

iii) to set general policies on tariff determination and service provision

of Licensee;

iv) to provide the policy on customer service standards and Licensee

standards;

v) to set the policy encouraging energy service extensions and

providing electricity services for the underprivileged;

vi) to approve the license fee and the fee for the Licensee;

vii) to approve the operational plan and the budget of the Authority;

viii) to provide the policy on the protection against and solution to energy

shortage;

ix) to approve the rules and codes of conduct of the Authority;

x) to provide policy in respect of private participation;

xi) to grant Licensees permissions for compulsory acquisition of

ownership or rights to land and water necessary for implementation

and operation of licensed activities; and

xii) to perform other duties as stipulated under this Act.

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While the law reformed the energy sector structure creating policy-making DHPS

(DHPS), distribution utility business BPC (BPC) and an independent regulator BEA

(BEA). The section needs to be reviewed in light of intended purpose of the reform and

its impact including the appointment of members to the authority.

Ownership

Under the Inter-Governmental model of hydropower development, there are no

ownership reversion issues. But reversion of ownership has become significant with

the introduction of Joint Venture, Public-Public and Public-Private Partnership

financing models. The SHDP2008 requires ownership reversion of the project at end of

the concession period in most cases except for investments by Bhutanese and

Bhutanese firms. However, section 37.1 of the Bhutan Electricity Act requires the

licensee, in contrast, at the end of concession period to transfer all assets to the

Government.

4.2.5 Projects that are fully owned by the RGoB/ RGoB agency or where

the RGoB / RGoB agency has a minimum of seventy four percent equity

and the balance shares are owned by the Bhutanese nationals, such

projects will not be required to be reverted to the RGoB at the end of the

Concession period (BSHDP 2008)

37 – Reversion of hydropower plants

37.1 On the expiry of a license for a hydropower plant, the ownership of

the plant including all existing installations, property and rights needed for

power generation shall be transferred to the Government without any

compensation to the Licensee (Bhutan Electricity Act, 2001)

The identified gap needs to be covered and, further, an additional question arises

concerning Royalty energy requirement during the period of extended concession

period and after concession period for projects owned by Bhutanese and Bhutanese

firms.

37.3 After transfer of ownership under subsection 37.1.states that the

power plant, including all installations, property and rights required for

power generation shall be dealt with by the Government in any manner it

deems appropriate (BEA 2001)

Further section 37.3 of the BEA 2001 requires transparency measures.

Bhutanese investors to own shares like any other investor and at the end of the

concession period, ownership of those shares to be reverted back to the RGoB.

Note: Section 4.2.5 of the SDHP 2008 needs to be amended.

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(e) The Land Act of Bhutan 2007

Non-adherence to the Land Act of Bhutan 2007 on procedures before project initiation

and taking over of private lands. The Land Act of Bhutan 2007 requires that before

private lands are acquired, compensation needs to be paid or substitute lands be

registered in the name of land owners.

158 The land under acquisition shall be taken over only after registering

the substitute land in the name of the affected landowner or the cash

compensation has been made to the landowner (Land Act of Bhutan 2007)

Further, non-adherence to condition of 3 yearly revisions of PAVA rate has brought

about unfairness in compensation.

154 The Property Assessment and Valuation Agency shall revise the

compensation rate after every three years. (Land Act of Bhutan 2007)

There are visible instances where the Land Act of Bhutan 2007 has been

disregarded and provisions disrespected by different implementing agencies. The

Land Act of Bhutan 2007 and its provisions concerning acquisition of private

lands for public and national purposes must be followed strictly. Laws once

passed must be respected and if provisions found unsuitable, it must be amended

but cannot be ignored.

(f) The Water Act of Bhutan, 2011

Precautionary Principle

9. A developmental activity shall be strategically planned and

executed in harmony with the carrying capacity of the country‟s

sensitive ecological settings and geographical terrains.

There is need to conduct carrying or absorptive capacity study keeping in minds

the ecological settings and geographical terrains.

71. The Commission, in consultation with other relevant agencies shall

ensure conservation and protection of wetlands, alpine regions,

watersheds, and other vulnerable ecosystems in addition to the existing

protected areas. (NEPA, 2000)

Integrated Water Resources Management

12.4 In order to utilize water resources in a sustainable manner for

hydropower generation, it is important to protect water catchment areas by

promoting sustainable agricultural/land use practices and nature

conservation works. The MoA in collaboration with MoEA shall work out

the modalities for integrated water resources management. A minimum of

1% of royalty energy in cash shall be made available on annual basis to

MoAF for this purpose. (BSHDP 2008)

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Note: Establishment under BSHDP 2008 (12.4 Minimum of 1% of royalty energy in cash

to be made available to MoAF). Establishment under BSHDP 2008 (5.7.1 & 5.7.2

Renewable Energy Development Fund)

Policy intent of protecting the environment and promoting integrated water resources

management has not been translated into action by the Government; policy objective

missing in legislation.

77. The Government may establish any environmental protection

funds as may be deemed appropriate. (NEPA, 2000)

The committee learnt that the Ministry of Agriculture and Forests currently does not

receive any funds (in a response received from the Ministry for a letter sent out on

July 7, 2015). The need to submit 1% royalty in cash annually to the Ministry is a

provision in the BSHDP 2008.

Government must ensure compliance to fulfilling policy provision of deposit of

1% royalty in cash annually to the Ministry of Agriculture and Forest for

conservation of integrated water resource management.

(g) Labour and Employment Policy and Law „The goal of the National Employment Policy is the achievement of full,

productive, meaningful, gainful and decent employment for the people of

Bhutan, which will drive the country towards achieving high levels of

human development and contribute to the maximization of the Gross

National Happiness.‟(National Employment Policy 2013)

Further, as echoed by the Prime Minister in his report to Parliament the essence of

the policy ‘...move beyond simply generating and selling power. We must invest and

build our capacity to become leading experts and a knowledge centre for hydropower

development in our own country, in the region and globally.‟; the priorities as

categorized as (i) employment creation, (ii) employability of the labour force, (iii)

aligning the employment market, (iv) working conditions and (v) equal employment

opportunities. The dearth of Bhutanese experts in the hydropower development even

after decades of project implementation and hiring of huge number of expatriate

workers is indicative of the lack of focus on long term planning in the human resource

development (university, education and labour ministry). This also indicates poor

coordination amongst government agencies that develop and implement hydropower

projects. Projects have also failed to allow Bhutanese to grow both vertically and

horizontally due to lack of transfer of skills.

This critical gap must be closed by the Government with clear strategies and

implementation timeline so that the projects in the pipeline can include in it the

translation of the intent and objective of the policy.

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The Labour and Employment Act of Bhutan 2007

Under the law, functions are listed as below:

21. The labour administration shall provide policies and

programmes in the areas of:

a) employment promotion;

(b) labour protection;

(c) labour relations;

(d) vocational education and training; and

(e) occupational standards setting and certification.

The Ministry has not been able to deliver on its mandates. This has forced the use of

expatriate workers at all levels and in huge numbers, affecting the national economy

in adverse ways.

Government must set out clear strategies with implementation timeline and

start acting so that the projects in the pipeline can include in it the translation

of the intent and objective of national policies of both hydropower development

and employment.

3.1.2 Hydropower related policies

BSHDP 2008

Additional concerns raised under the policy:

Section 3.6 outlines broadly the responsibility of the DGPC (DGPC). It is noted that

that DGPC plays a critical role in research and development of hydropower and this

can be extended to more strategic roles as under:

a. RGoB to consider strengthening the role of DGPC as member to the

Empowered Joint Group and in the Technical Coordination Committee.

b. Take a lead role in accelerating hydropower development.

c. Build capacity in hydropower development.

Government must strengthen DGPC’s role in hydropower development.

Investment model and period

4.2.5 Projects that are fully owned by the RGoB/RGoB agency or

where the RGoB or RGoB agency has minimum of 74% equity and

the balance shares are owned by the Bhutanese nationals, such

projects shall not be required to be reverted to the RGoB at the end

of the concession period.

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At the end of the concession period, in case of projects with investment mix that

does not need to be reverted to the RGoB, Royalty energy contribution from the

project should be increased above 18%. This recommendation will need to be

accompanied by amendment to section 37.1 of the Bhutan Electricity Act 2001.

Royalty energy contribution figure differences between the BSHDP 2008 and the

Economic Development Policy 2010.

4.6.3 A minimum of 12% of electricity generated shall be made

available free of cost to the RGoB as Royalty Energy during the

first 12 years of commercial operation of the project and a minimum

of 18% thereafter till end of concession period. This free

power/energy shall be in addition to the up-front premium as

indicated under sub-clause 4.6.2. The project shall be allotted to

the bidder offering the highest Royalty energy over the minimum

specified.

This proviso above in the BSHDP 2008 contradicts with section 7.2.9 of the Economic

Development Policy which requires 15% Royalty energy contribution to the RGoB by

producers. The mechanism used to arrive at the average requires rethinking as it

considers the applicable minimum of 12% for the first 12 years and automatically

assigns minimum of 18% thereafter. Therefore, the identified gap needs to be

addressed.

The discrepancy between the two policies needs to be addressed concerning

royalty energy contribution percentages.

There is a need to decide if royalty energy requirement needs reconsideration

when at the end of a concession period, the government decides to let other

producer(s) take over the hydropower plant or enters into new contract(s).

Expatriate employment and work permits

5.5.1 Foreign companies will be allowed to bring in expatriate personnel in

areas where there are shortages of Bhutanese with requisite skills and in

accordance with prevailing laws of the kingdom of Bhutan.

While there are visible attempts to employ locals in the project authorities, there

appears to be no visible results concerning employment by private companies involved

in the projects. There is room to implement the lower provision from employment

policy.

1.3 The MoLHR shall allow recruitment of foreign workers only in those

occupations where Bhutanese with appropriate skills are not available

(National Employment Policy 2013)

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Government must ensure compliance to the national employment policies and

laws. Given the dire situation of unemployment in the country and youth

unemployment in particular, this has become crucial.

Social considerations

13.1 Land acquisition and compensation

13.1.2 – In addition to land compensation provided above, the RGoB shall

provide free electricity of 10,000 kWh per annum for every acre of land (or

prorated thereof), acquired for the project from the Royalty energy after the

project comes into commercial operation till the end of the initial concession

agreement. The land owner may either avail free electricity or cash in lieu

thereof at the export rates from the projects. Such benefits will continue

beyond the concession period.

Section 13.1.2 requires compensation of free electricity till end of concession period.

However, the same section also allows such benefits to continue beyond concession

period which contradicts the earlier intent and causes confusion. The section needs

rethinking and realigning.

Further, there is divergence in how land acquired for different public infrastructure

development is compensated by the Government. Compensation in hydropower

development project includes different layers, i.e., (i) land or cash in lieu, (ii)

employment, and (iii) free electricity under the BSHDP 2008.This further raises

another question concerning compensation with regard to hydropower development

which concerning Right of Way for lands affected by electricity transmission lines.

Differing in compensation thinking is visible taking another example of private land

acquired for public infrastructure development where affected individual is

compensated with either land or cash in-lieu options.

Government needs to align compensation measures regarding affected private

lands in order to dissolve away increasing sentiments of unfair compensation

among the public.

Local employment, Bhutanese employment, deployment

13.4 Local Employment

As MoLHR is being mandated to facilitate timely recruitment and development of skills

in collaboration with project developers (not only during the operation and

maintenance phase but also during the implementation of the project), the committee

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sees the need for MoLHR to play an appropriate role in ensuring the recruitment of

Bhutanese, both in the Project Authority and in private firms.

Section 13.4.3 of BSHDP 2008 requires the developers to provide training to

such eligible persons based on their education qualification so that they are in a

position to get employment for various jobs in the project. The company shall

implement a training program endorsed by MoLHR for transfer of Technology and

enhancement of skills in Bhutanese workers.

The committee expresses serious concerns over the failure in creating space for

Bhutanese expertise in HPPs even after more than three decades of hydropower

development. Without a clear policy or strategy, this worrying trend may continue and

perpetuate external dependence on the human resource front.

Accordingly the committee urges project developers to allocate separate fund for skills

development and transfer during the implementation phase of the project, as done by

Nikachhu project in Trongsa.

Government must ensure implementation of BSHDP 2008 and the Labour and

Employment Act 2007.

14.1The RGoB may implement hydropower projects outside of this

policy through any other models as deemed necessary in order to

achieve the goal of accelerated hydropower development.

The proviso undermines all other provisions in the policy and further hinders the idea

of bringing transparency in decision-making.

The particular proviso needs to recognize that anything outside of a clear policy

or law will need the support of Parliament before acted upon.

3.1.3 Resettlement and compensation in hydropower development projects

Rehabilitation and resettlement

13.2.1 The developer shall provide an amount not exceeding 1% of the

project cost for the rehabilitation and resettlement of the displaced persons

from the project area and other local development activities, which shall be

specified n the RfB. This amount shall be paid at the time of signing the

concession agreement. The RGoB shall implement the Rehabilitation,

Resettlement and Local Development Plan in consultation with the Local

Development Committee.

19

Policy sees the constitution of a local development committee. The RGoB would

implement it in consultation with the local development committee. It has been

observed that there is no uniformity in the use and management of the fund. However,

since the objective of the fund is for rehabilitation, resettlement and not only local

development plan, there is a case for argument that the fund use control should be

more with the local government and administration to address issues arising out of

the project.

There is need to draw up a procedural and criterion framework for the use of

rehabilitation, resettlement and local development plan fund. It needs to incorporate

consultative procedure with the local development committee as the policy requires.

Reports received from Punatsangchu projects appear indicative of non-involvement of

local government and Dzongkhag administration in decision-making on activities and

fund use.

13.3 Basic infrastructure as part of the project

13.3.1 The necessary infrastructure for the construction/development of

the project and local area development will be part of the project and shall

be developed by the developer, the scope of which will be indicated in the

RfB and elaborated in the DPR. In case the RGoB intends to bear a part of

such cost, it will be specified in the RfB and the concession agreement.

Temporary colony in case of Mangdechu appears built over excessive cost and

permanent colonies have been delayed. There appears to be an opportunity for

consideration of planning one colony instead. Further, the use of pre-fabricated

housing for temporary colonies may optimize resource use as it could be re-used in

other projects for similar purposes.

There is need to draw up a procedural and criterion framework for the use of

rehabilitation, resettlement and local development plan fund. It needs to

incorporate consultative procedure with the local development committee as the

policy requires.

3.2. Institutional mapping and analysis of sectoral decision-making

set up

3.2.1 Institutional mapping

These are the agencies that are involved with hydropower development in Bhutan at

the moment. They are the Ministry of Economic Affairs, the Ministry of Foreign Affairs,

the Ministry of Finance, the Ministry of Home and Cultural Affairs, the Ministry of

Works and Human Settlement, the Ministry of Agriculture and Forests, the Ministry of

Labour and Human Resources, Bhutan Electricity Authority, Gross National

Happiness Commission, National Environment Commission, National Land

Commission, Druk Green Power Corporation and Bhutan Power Corporation (through

Druk Holding & Investments) and investors.

20

Hydropower development should be included within the FYPs and consequently

reflected in the budget.

Hydropower project audit reports should be submitted to Parliament.

Institutional responsibility for social impact assessment is found lacking unlike

for environment where NEC has been mandated. There needs to be more focus.

Government needs to make arrangements with investors to ensure minimum

disruption in fund flow to avoid project delay and related cost escalations.

3.2.2 Institutional arrangements of the hydropower sector

The power sector has undergone major restructuring since 2002 after the enactment of the Bhutan Electricity Act 2001. The department of power has been split into five organizations: DHPS and DRE, both under the MoEA for policy making and planning of all aspects of the energy and power sector; BEA for regulation of the electricity industry; BPC for transmission and distribution of electricity; and DGPC for development and management of hydro power projects during the time of construction and operation and maintenance of powerhouse.

3.2.3 Linkages between hydropower planning and related plans

This section describes how the planning process and plans for hydropower link to other development plans, for example socio-economic plans and other sector development plans (e.g. industry, agriculture, etc.,) land use and land development plans.

A study on the absorptive capacity and socio-impact of hydropower projects was carried out by the World Bank and shared with the Government. The committee learnt that the study points towards disconnect between five yearly plans and hydropower development plans and activities. (Committee members met World Bank senior economist on August 10, 2015)

In 2002, a strategic environment assessment (SEA/SA) was initiated by the NEC and led by the GNHC along with the NLC and Dzongkhags. This was the first such exercise and came out with a 8 point recommendation.

The study felt that complex investment projects needed to be subject to SA and further, in order to mainstream it at the Dzongkhag level, the offices needed to be equipped to ensure that these deliver optimal development outcomes with minimal

21

environmental and social impacts. An important recommendation also pointed to the 11th Five Year Plan and its need to be elaborated on the basis of systematic SAs carried out at Sub-National levels to ensure that each constituent element of that plan is consistent and coherent to national development objectives, contributing to local development objectives. It also pointed to the importance of GNHC’s role in making this happen and the need to institute proper procedure for SA for several other areas in the economy that may see complex investment projects. There are no other known attempts at looking at hydropower development plans and overall national development plan.

4. Hydropower Development Process

Project selection criteria

Criteria for selection of a project are based on six factors given below in figure 1 and

details are included in annexure 1.

Figure 1: Basis for selection of the projects

4.1 Hydropower Project Planning/Implementation Cycle

The planning cycle recognizes that projects have a limited life span and are focused

over the project. The life cycles of the project typically passes sequentially through 7

stages as shown in figure 2 below:

Economies of Scale by

selecting bigger projects

PSMP Ranking (MCA)

• 70% Techno-economic

• 30% Socio-environment

Balanced Regional

Development

Enhancement of Energy Security

and Value

Availability of DPR

Synergies of Integrated

Development in same basin

22

Figure 2: Hydropower project planning cycle

Details of project planning / Implementation cycle is explained in annexure 2

4.2 Stages in the DPR Preparation:

Detailed project report is an important tool for an investment decision. It involves

investigation and studies, surveying and mapping, optimization of power potential,

environment impact assessment, engineering and designing, construction

methodology, project scheduling, budgeting, resources planning and risk mitigation

planning. The sequence of activities under this stage is shown in figure 3:

Reconnaissance Study (RS) DHPS

Pre-feasibility Study (PFS) DHPS, DGPC & Consultants

Detail Project Report (DPR) DHPS, Consultants, DGPC & EJG

Pre-Construction DHPS, DGPC & Authority

Construction /Execution DHPS, DGPC & Authority

Delivering DHPS, DGPC & Authority

Operation Maintenance DGPC

23

Figure 3: Diagram of DPR process

DPR Preparation stages for Mega Hydropower Projects within the 10,000 MW:

Projects selected for DPR studies based on Multi Criteria Analysis, such as

Technical, Economic, Social and Environmental factors as shown in figure 3;

Financing commitment from GoI/Donor

Financing of DPR Preparation by GoI/Donor

DPR Consultants identified based on nomination/bidding basis:

WAPCOS for Chukha, Tala, Puna-I&II;

NHPC for Kurichhu & Mangdechhu;

Bernard Engineers for Basochhu-I&II and Dagachhu;

LII/DGPC for Nikachhu

No Mechanism in place to fix Accountability & Liability for the DPR shortcomings -

RGoB’s PRR also has no such provisions

No capacity with the RGoB Agencies for DPR preparation

DPR Preparation time - usually 2 years

For DPRs financed by GoI – WAPCOS engaged GoI’s Technical Agencies (CEA, CWC,

GSI, CSMRS, CWPRS, IMD, NIRM, IIT-Roorkee etc.)

24

Adequacy of the DPRs-DPR prepared in keeping with the Guidelines of CEA/CWC -

GoI, Bounded by Time & Resources

Draft DPR submitted to RGoB and CEA, GoI

CEA – Competent GoI Agency to accord Clearance of DPRs

Once cleared by CEA, RGoB Clearance sought

CEA’s Clearance – Main basis for Project financing by GoI and implementation

Preparation of the DPR involves foreign consultants in absence of domestic

capacities that carry out studies and submit reports to serve as basis for

decision(s). It has been noted that some of these reports have not delivered as

expected. However, since the consulting firms were foreign and do not have

domestic presence, projects have failed to hold them accountable.

Bhutanese and local consulting firms need to be given top priority in preparation

of DPR.

4.3 Project Implementation

During this phase, physical plans for pre-construction and construction phases are

prepared, time and cost implications are worked out; specifications and monitoring

mechanism are put in place for control. Processes that take place in the project

implementation phase are depicted in figure 4 below:

Figure 4: Work flow of project implementation

Guided by Bilateral

Agreements

Preconstruction works 6months-

2years

Formation of Project

Authorities/

Companies

IG projects handed over to

RGOB after 2years of

commissioning

Project commissioning usually after 6-

10 years

Construction of projects-Funds released based

on progress and budgets proposed

25

4.4 Cost Escalations:

Cost escalations in mega hydropower projects is attributable mainly to

inflations, natural calamity, adverse geological conditions, improper

investigations & design, inadequate resources mobilization and improper

decision making, etc., Some of the factors causing cost escalations are shown in

figure 5:

Figure 5: Cost escalation factors

Cost escalation is caused mainly by the following factors:

i. Long gestation period of the project: Hydropower projects had taken

construction time of, typically, from 7 years for Basochu (from Nov. 1997

to Sept. 2004), 7 years for Kurichu from 1995 to 2002, to 9 years for Tala

(Oct. 1997 to July 2006), to 24 years for Chhukha from 1974 to 1988.

Such prolonged project duration would experience multiple leaps in

inflation, causing significant cost escalations.

ii. Natural calamities during the construction resulting into project delay:

This is an avoidable circumstance for the project management. At best,

the project management could maneuver to reduce cost escalations.

iii. Changes in design/variations/ inadequate provisions/change in

scope/additional requirements or new items, etc. This indicates the flaw

in DPR and of unsound project planning.

•Mechanisms for Costs Escalations given in the Bid Documents

•Primary Cost escalations due long gestation period (Inflation)

•CWC Guideline-DPR costs estimates to be based on current cost without provisions for future increase

•Change in design/variations/inadequate provisions/change in scope/additional requirements eg. adverse geological conditions

•CWC Guideline-Revised Project costs during execution need to be submitted to CEA/CWC

•Natural Calamities

26

iv. Confrontation with adverse geological conditions during the construction:

This is another unavoidable circumstance for the project management.

v. Inefficient project management resulting into avoidable delays and cost

overruns: As difficult as it would be to pinpoint the inefficiency in the

management, the project management system and the overall structural

setting should enable the Government(s) to hold somebody accountable

for such advertent lapses and oversight failures, if any.

The following table shows comparatives of DPR costs, actual costs, project durations,

etc., of the hydropower projects that have been completed.

Table 2: Costs of HPPs (All Nu. in millions)

Particulars Chhukha Basochu Upper

Basochu Lower Kurichu Tala Dagachu

DPR Cost 831 1,446 1,422 3,130 14,080 8,208

Actual Cost 2,465 1,440 1,821 5,600 41,258 12,516

Escalated cost 1,634 403 399 2,470 27,178 3,944

Escalated % 197% (27.86%) 28% 79% 193% 48%

Project duration 1974-1988 1997-2001 1997-2004 1995-2002 1997-2006 2009-2015

As shown in the table above, the project cost escalation ranged from negative 27.86%

(the actual cost was less than the initial estimated cost) for Basochu Upper to a

whopping 197% for Chhukha and another 193% for Tala. Incidentally, those projects

where Bhutanese had greater involvement in the management had all cost

escalations below 100%, unlike in Chhukha and Tala. The most cost-efficient

projects are the Basochu projects where Austrians were involved.

There is need to improve project costing by taking into account time gap

between DPR preparation and actual commencement of project by providing an

updated DPR cost as on the project commencement date.

Deviations from DPR must fulfill all requirements before being implemented.

Third party vetting on DPR needs to be considered given past experiences of

lapses without it.

27

5. Operational decision-making set-up and procedure of

hydropower development projects

Figure 6: Operational decision-making set-up

6. Challenges and Opportunities

6.1 Challenges

1. Hydropower revenue management - Savings and Capital investments

need to increase proportionately as revenue earnings from hydropower

increases. Policy requirement of setting aside savings and investments

have not been met with, i.e., requirement of minimum 1% of royalty

energy in cash to be made available on annual basis to the Ministry of

Agriculture and Forests for integrated sustainable water resource

management as per BSHDP.

Operation and Maintenance - DGPC

Transfer of Projects & redeployment of project resources -DHPS/DGPC/Project Authority

Finalization and award of Main Packages/Works-Project Authority

Review of DPR/Construction of infrastructure/preparation of tender document (MP)/mobilization of resources-DHPS & Project Authority

Appointment of Project Authority - RGOB & GOI

28

Table 3: Trend of electricity revenue

Particulars 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Electricity

revenue

2,791.77

2,917.32

3,707.22

4,198.17

4,379.95

4,335.29

10,649.02

11,529.59

10,705.22

10,848.46

14,089.77

13,656.77

Revenue

collected 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15

Tax-revenue 2,689.896 3382.367 4,124.68 4266.911 5,238.357 5,828.807 9,655.781 11,593.486

14,676.929 15,403.118 16,182.774 18,259.128

Non-tax revenue 2,365.299 2683.734 2,778.226 5815.249 7,107.627 8,019.608 5,982.653 5,865.311 5,677.533 5,698.573 7,061.836 6,640.989

Total 5,055.195 6066.101 6,902.906 10082.16 12,345.984 13,848.415 15,638.434 17,458.80 20,354.462 21,101.691 23,244.610 24,900.117

Budget Outlay

(Millions): 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15

Capital

6,332.09

7,158.34

8,904.20

7,952.88 9,967.310

15,047.60

12,929.14

14,735.058 18,137.114

18,431.26

16,668.75

18,836.94

Current

5,569.10

5,968.66

7,198.10

7,636.23

9,725.719

11,910.83

12,902.69

14,786.847 16,705.648

18,096.55

17,941.15

22,044.14

Total Outlay 11,901.19 13,127.00 16,102.30 15,589.11 19,693.029 26,958.43 25,831.83 29,521.905 34,842.762 36,527.81 34,609.9 40,881.08

Figure 7: Graphical presentation of the trend in electricity revenue

As shown above, it strongly reinforces the view that increase in revenue generation

has been always used to fatten the budget outlay, except in 2009-10 where the budget

outlay had reduced to Nu.25,831 million from Nu.26,958 in 2008-09, and in 2013-14

to Nu.34,609.9 million from Nu.36,527.81 in 2012-13. This evidence supports the

committee’s findings that additional revenue, either generated from electricity or from

other sectors, were always used to fund the yearly budgets. Hence, there was no

savings or reserves whatsoever created out of the yearly revenue earnings.

The figures in the above table supported by the graph convey one key message: our

Government had not initiated any savings drive from the annual electricity earnings.

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Electricity Revenue

Total Revenue

Budget Outlay

29

Both governments were conservative with modest budget allocation when they entered

office, but on the whole, grew lavish with exorbitant annual budgets in the later years.

For instance, the then government had annual budget of Nu.25,831.83 million in

2009-10 as against Nu.26,958.43 in 2008-09. However, the following three years, i.e.,

2010-11, 2011-12 and 2012-13 were funded with hefty budget of Nu.29,521.905

million, Nu.34,842.762 million and Nu.36,527.81 million respectively. The rate of

budget increase was 14.3% in 2010-11, 18% in 2011-12, and 5% in 2012-13. For the

same period, the revenue increase was only 11.6% in 2010-11, 16.6% in 2011-12 and

3.67% in 2012-13.

Similarly, at present budget of Nu,34,609.9 million in 2013-14, which is down by

5.25% from the final year of the then government’s budget of 2012-13. However, the

budget mood swung into incremental mode by 18% to Nu.40,881.08 million in 2014-

15 and by another 15.8% to Nu.47,348.166 million in 2015-16. The increase in

national revenue in 2014-15 over 2013-14 was only 7.12% as opposed to 18% budget

hike for the same year.

It has been observed that increases in annual budget figures was always higher than

the corresponding increase in revenues in order to meet the growing developmental

needs of the nation. Due to compelling urgency for developmental needs, it would be

beyond any government’s ability to plough back any revenue to save for the future.

Therefore, the government may look into current rate of return on equity from

investments.

2. Absorptive capacity - The economy is largely driven by investments in the

hydropower sector. The huge requirement, both in terms of financial and human

resources, in order to execute several large scale hydropower projects

simultaneously is a challenge. While the policy addresses most resource gap

scenarios, enforcement and monitoring is noted to be very weak. Institutional

mandates lack alignment with long term policy objectives and consideration of new

actors in hydropower development and management. E.g., DGPC takes on the

responsibility of developing national capacity in hydropower development and

management. However, the policy fails to recognize this role in human resource

development and lacks clarity in terms of direction on hydropower development,

while playing the dual role of back-stopping the MoEA and short term profit centric

investor under the DHI. Planning in the hydropower sector appears to be

disconnected with other development plans in the country. Consequently,

alignment of project infrastructure development with that of local infrastructure

development plans, project requirements like food and labour as against local

agriculture, enterprise and employment development plans does not communicate

and hence, it fails to capitalize on project investment. (Lack of taking integrated

and collaborative approach). This also contributes to money flowing out of the

economy, creating more strain on the rupee reserve. Without aligning hydropower

into the national development plans, the opportunity to reap the full potential of

30

hydropower development will be lost. Therefore, the question of attaining a

favourable absorptive capacity will remain unaddressed in perpetuity and our

national aspiration of growing away from donor dependence will remain a distant

dream. Therefore, sectors need to align their activities in such a way that would

allow maximum benefits to the national economy from on-going and future

hydropower projects.

3. Single export market - Given signs of strong growth in the region, it is expected

that energy requirement will continue to grow. The demand for Bhutanese energy

in India and the regional market will only increase; Bhutan, however, faces high

risks as an exporter to a single market. This is more relevant as hydropower

development considers other financing options.

4. Cost escalations and geological surprises - Hydropower projects at the moment

earmark under an average of 0.42% of total estimated project cost for carrying out

prefeasibility study and detailed project report thereafter. International per se it

was learnt that the average cost is around 1-2% and with Japan leading the way

with expenditure as high as 5%. The amount of time and resource spent in

carrying out these activities have a direct bearing on the geological confirmation;

the more detailed the study, the better prospect of a project not confronting a

geological problem. Factors resulting in cost escalations need to be segregated in

order to ascertain reasons and justifications. This could help to understand and

control cost for those factors which are avoidable.

5. Financing - The enormity of investment size and the number of projects affect the

choice of financing options. While smaller projects may still explore private

investments by Bhutanese, large projects remain hindered by market

inaccessibility and therefore, financing.

6. Knowledge and technology transfer - After more than 3 decades of hydropower

development in the country, Bhutan still does not have national experts. Both civil

servants and private players are found lacking in capacity as a result of absence or

poor engagement at appropriate levels. Immediate measures must be taken in

order to involve Bhutanese at appropriate places so as to allow transfer of

knowledge within the shortest possible time.

7. Discrepancies between the Policy and Memorandum - Section 4.3.6 of BSHDP

2008 concerns public-public partnership and it requires that the RGoB have a

minimum of 51% shareholding. However, hydropower projects in contradiction to

this exist.

31

8. Impact of hydropower projects on GDP – The public perception, both at semi-formal and informal settings, surmised that the volume of hydropower project activities was one of the key determinants of country’s GDP and its growth rate. Conveniently, the depressing GDP growth of 2.1% in 2013-14 Fiscal was attributed to the supposedly low level of hydropower project activities during the year. This theoretical assumption of low hydropower project activity in 2013-14, if true, were perceived as an outcome of the Government’s supposedly apprehensive approach towards availing additional hydropower loans from GoI. The public had further perceived that in FY 2013-14, even the fund releases and disbursements of hydropower debt from GoI were either delayed or not received by the Government as scheduled, which resulted in reduced hydropower project activities during the year and ultimately affecting the GDP growth rate to meager 2.1%. Therefore, in an attempt to unravel this public discernment, comparison between annual Hydro Debt amounts, GDP at current prices, and amounts of annual disbursement of hydro debt fund from the GoI for the last seven Fiscal Years are shown below.

Table 4: Hydropower debt, fund disbursement and GDP - 2008-2015

Fiscal

Year Hydro Debt

Hydro Fund

Disbursement GDP at Current Prices

Nu. Growth % Nu. Growth % Nu. Growth %

2008-09 17,483 1,745 54,744

2009-10 18,278 4.54 2,376 36.16 61,221 11.83

2010-11 24,648 34.85 7,952 234.67 72,497 18.42

2011-12 32,546 32.05 9,409 18.32 85,913 18.51

2012-13 44,369 36.33 13,638 44.95 97,453 13.43

2013-14 56,596 27.56 14,271 4.65 104,378 7.11

2014-15 73,196 29.33 18,130 27.04 119,546 14.53

(Nu. in millions) Source: RMA Annual Reports

As evident from Table 4 above, there was no decrease in the total amounts of

Hydropower debt between 2008-09 and 2014-15. In fact, the total hydropower project

debts had actually increased from Nu.17,483 million in 2008-09 to Nu.73,196 million

in 2014-15. However, the incremental percentage of hydropower project debts from

year to year was not consistent. The total hydropower project debts have increased by

4% in 2009-10, 34.85% in 2010-11, and eventually grown by 29.33% in 2014-15.

Accordingly, the fund disbursements from GoI had also varied from year to year. For

instance, the sum disbursed had increased by 234.67% in 2010-11, 44.95% in 2012-

13, and eventually by 27.04% in 2014-15.

32

Figure 8: Hydropower debt, fund disbursement and GDP trend

Figure 9: Hydropower debt, fund disbursement and GDP trend

Referring to FY 2013-14 when the economy plummeted to dismal 2.1% growth rate,

the Table and graphical representations above reinforce the public perception that it

was caused due to low level of hydropower project activities. The figures and graphs

above suggest that the additional hydropower debts and fund disbursements from GoI

was the lowest in 2013-14 compared to the immediate preceding three years. Needless

to mention here, the actual volume of hydropower project activities in the country

would depend on the actual amount of fund available in the country and not the total

debt agreed by GoI. In FY 2013-14, while the total hydropower project debt had

increased by 27.56% from 2012-13, the actual amount of fund disbursement from GoI

in 2013-14 had increased by paltry 4.65%. This had correspondingly resulted in

measly 7.11% GDP growth rate in 2013-14 from 13.43% in 2012-13 at Current Prices

(not to misunderstand with GDP growth rate of 2.1% in 2013-14 and 5.1% in

2012-13 at Constant Prices, Base Year 2000).

0.00

20,000.00

40,000.00

60,000.00

80,000.00

100,000.00

120,000.00

140,000.00

2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15

Hydro Debt

GDP at current prices

Fund Disbursement

0

36.16

234.67

18.3244.95

4.6527.04

0

50

100

150

200

250

300

350

2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15

Gro

wth

%

Fund Disbursement

GDP at current prices

Hydro Debt

33

6.2 Opportunities

1. Abundance of water resources – Studies have found that Bhutan has

hydropower potential of 30,000 MW of which 23,760 MW is techno-

economically feasible. 16151 MW of hydropower has been harnessed,

representing a little more than 6%. Meanwhile works are underway to

harness another 36582 MW of hydropower. This would still represent only

about 22% and would leave an approximate of 78% of techno-economically

feasible hydropower development untapped. Unlike other resources,

hydropower potential cannot be stored and saved for later use. Therefore,

recognizing that delay in decision-making in the hydropower development

comes at huge opportunities foregone, the Government must take

appropriate and timely decisions.

2. Employment - Total employment generated at the construction phase of

Punatsangchu I & II along with Mangdechu stands at 51,6653 out of which

10,987 (approximately 21%) are Bhutanese against 40,738 (approximately

79%) expatriate workers. Unemployment in the country is a huge challenge

and it is expected to worsen. While the policy requires training and

employment of locals, this has not been translated into action. In order to

employ more Bhutanese in future projects, the Government must create

conducive environment (training, wage, safety and insurance, etc) for

Bhutanese to step forward and take up employment, including Bhutanese

businesses.

3. Hydropower development beyond hydropower – Learning from past

projects, the construction phase of hydropower development involves the

migration of large expatriate population and expenses on preparatory works.

The failure to sync sectoral plans with hydropower plans has led to

scenarios where even basic food items continue to be imported. Local

entrepreneurship programmes have failed to capitalize on the mega projects.

This is all indicative of the failure to integrate hydropower plans with

national and local plans. Therefore, the Government should link its strategy

to promote economic growth and its objectives, to reduce poverty. This

should be made more explicit in terms of hydropower policy formulation and

implementation.

1CHPC, THPC, KHPC, BHPC, DHPC and micro, mini hydels.

2PHPA 1 & 2, MHPA, KHPA and THPA (Nikachhu).

3PHPA 1 & 2 and MHPA.

34

4. SAARC Energy Cooperation Agreement on Energy (Electricity) – An

outcome of the 16th SAARC Summit was a concurrence on the need to

enhance energy sector to facilitate its trade. Flowing from the outcome, a

SAARC Energy Cooperation Agreement on Electricity was ratified by the

member Governments and awaits ratification by respective Parliaments;

Bhutanese Parliament has ratified. The instrument presents an opportunity

and Government must expedite efforts to translate the objectives of the

Agreement into action in order to enhance market choices and expand

financing opportunities.

5. Working towards energy security – While Bhutan is energy sufficient,

cyclical deficit in the winter season and resultant import of energy may pose

an increasing problem as domestic energy demand increases. All

hydropower projects in the country at the moment are run-off the river

scheme and it may be worth considering reservoir project to cater to winter

seasons to reduce imports.

6. Creation of an Energy Development Fund – 10% deduction from

dividends maintained by DGPC for O&M of power house infrastructures is

the only expense that maybe closes to reinvestment at the moment.

Government needs to consider and make necessary policy intervention to

direct reinvestments for project development activities.

7. Loan servicing capacity of Hydropower projects – As much as the hydro

power projects are blamed for numerous economic woes like the rocketing

inflation rates, drainage of INR out of the country, etc., etc., the truth

remains that these projects have the capacity to self-liquidate debts the

Government is availing bilaterally and multilaterally from outside.

Furthermore, the Inter-Governmental mode of financing Hydropower

projects agreed between the two Governments of Bhutan and India prove

flawless in terms of project viability and financing arrangements.

Notwithstanding the change in Debt:Equity ratios agreed between the two

Governments from project to project, this mode of financing would reap

immense economic and financial benefits to both Bhutan and India. As an

illustration, loan servicing capacity assessment for Tala Hydropower Plant is

computed below:

35

Table 5: Assessment of loan servicing capacity: Tala Hydro Plant

Year

Annual

revenue

(A)

Loan

Equated

Annual

Instalment (B)

Operating

expenses net of

depreciation and

interest (C )

Total Fund

outflow

(D=B+C)

Profit

before

depreciation

and tax

(E=A-D)

2008 2,544.12

2009

6,445.04 2,544.12 815.03 3,359.15 3,085.89

2010

7,256.87 2,544.12 1,090.00 3,634.12 3,622.75

2011

6,761.56 2,544.12 951.57 3,495.69 3,265.87

2012

6,992.36 2,544.12 933.57 3,477.69 3,514.67

2013

8,846.37 2,440.39 2,004.91 4,445.30 4,401.07

2014

8,501.69 1,220.19 1,992.32 3,212.51 5,289.18

2015 8,113.47 1,220.19 1,643.60 2,863.79 5,249.68

2016 8,487.18 1,220.19 1,880.28 3,100.47 5,386.71

2017 8,367.45 1,220.19 1,838.73 3,058.92 5,308.52

2018 8,322.70 1,220.19 1,787.54 3,007.73 5,314.97

2019 8,392.44 - 1,835.52 1,835.52 6,556.93

2020 8,360.86 - 1,820.59 1,820.59 6,540.27

2021 8,358.67 - 1,814.55 1,814.55 6,544.12

Annual Revenue and Operating Expenses from 2015 onwards are projected at an average of the preceding three years.

Table 4 above reveals the financial performance of Tala Hydropower plant’s from 2009 till 2014 and projected figures from 2015 onwards. The annual revenues of the plant are compared with its unavoidable annual fund outflows. As can be seen in the Table above, the last column shows the amount of fund left with the plant after paying out its annual Equated Loan Instalments (ELI) and other operating expenditures. These figures are the Plant’s annual profit before depreciation and taxes, thereby proving the point of its ability to service its loan repayments. The loan term for Tala Hydropower plant is 12 years and it fully liquidates its loan by 31 Dec. 2018, i.e., the plant shall be

loan-free from 2019 onwards. Typically in the Bhutanese context, hydropower plants’ life is estimated at 30 years subject to extension by another 5 years if it were a PPP-model plant. But in no intention or the remote practical possibility will the hydropower plant be rendered obsolete after 30-35 years. Elsewhere around the world, „hydropower projects have a long life span of 50 to 100 years or more, unlike thermal plants having a lifetime of 25 to 30 years. Also operation and maintenance costs of hydropower plants are very low when compared to thermal plants4‟. Further, „with an

4 http://www.aboutcivil.org/hydropower-advantages-disadvantages.html

http://www.aboutcivil.org/hydropower-advantages-disadvantages.html

36

average lifetime of 50 to 100 years, hydroelectric developments are long-term investments that can benefit various generations. They can be easily upgraded to incorporate more recent technologies and have very low operating and maintenance costs5‟. Taking the similar stand, be it after 12 years (for IG model funded projects) or after 30-35 years (for Joint venture PPP model), the hydropower plants in Bhutan would certainly have economic longevity with incomes that would far outweigh the initial investments and recurring annual Operation & Maintenance (O&M) expenditure. The above figures of Tala Plant from 2009 till 2014 and the projections from 2015 are all inclusive of its grand total O&M expenditure and its annual EAIs. It may be noted that Chhukha Hydropower plant had liquidated its debt in 2007 after servicing its EAIs for 15 years. Similarly, Kurichu Hydropower plant will be paying out its last and final EAI in Dec. 2015 after 12 years of EAI repayment.

Other hydropower plant, such as Basochu has a loan repayment term till 2025.

Dagachu Hydropower plant has a mixed of varying loan terms with different creditors

with different loan amount and interest rates. It’s a PPP model plant with loan from

Asian Development Bank (ADB), Austria (OeKB) and local investor National Pension &

Provident Fund (NPPF). ADB has a loan term of 25 years while Austria (OeKB) and

NPPF have loan terms of 11 years and 15 years respectively. To sum up, all the

hydropower plants, either with loans fully liquidated or those currently serving EAIs,

have economic lifespan with tremendous potential to contribute towards the national

development in future years.

7. Recommendations

1. Planning

a. GNHC needs to align local development with hydropower development

plans.

b. Clear strategies with implementation timeline needs to be drawn up so that

the projects in the pipeline can include in it the translation of the intent and

objective of national policies on both hydropower development and

employment.

c. Hydropower development should be included within the FYPs and

consequently reflected in the annual budgets. Additionally, audit reports

should be submitted to Parliament thereby strengthening parliamentary

oversight function.

5 http://water.usgs.gov/edu/hydroadvantages.html

http://water.usgs.gov/edu/hydroadvantages.html

37

d. To ensure minimum disruption in fund flow to avoid project delays and

related cost escalations, arrangements with investors to ensure the same

must be worked out.

2. Financing and Ownership

a. Ownership of shares by Bhutanese and Bhutanese firms to be treated

similarly as in the case of other investors and shares will need to be reverted

back to the RGoB at the end of concession period. Section 4.2.5 of the

BSDHP 2008 will need to be amended,

or,

At the end of the concession period, in case of projects with investment mix that

does not need to be reverted to the RGoB, Royalty energy contribution from the

project should be increased above 18%. This recommendation will need to be

accompanied by amendment to section 37.1 of the Bhutan Electricity Act 2001.

(Alternative provision)

3. DPR

a. Bhutanese and local consulting firms may be given preference in the

preparation of DPRs.

b. A guideline for preparation of DPRs based on lessons learnt on hydropower

development would help facilitate in preparation of good DPRs.

Comprehensive DPR preparation and techno-economic vetting needs to be

carried out by third party before implementation decision is taken including

major deviations.

c. There is need to improve project costing by taking into account time gap

between DPR preparation and actual commencement of project by providing

an updated DPR cost on the project commencement date.

4. Resource Development

a. DGPC’s role in hydropower development needs to be strengthened.

b. Initiate institutional capacity development and creation of Bhutanese

talents in hydropower planning and designing in order to reduce over-

dependence on external expertise.

c. There is need to think about encouraging savings and reinvestment from

hydropower projects by way of revenue management. Declaration of

38

dividends and therefore retention of profits for plough back is an avenue for

consideration.

5. Tariff

a. To address rising electricity price under the cost plus model tariff setting,

optimal utilization of resources must be ensured.

6. Royalty Energy

a. The discrepancy between the BSDHP 2008 and FDI policies need to be

addressed concerning royalty energy contribution percentages.

b. The royalty energy requirement needs reconsideration at the end of a

concession period if and when the government decides to let other

producer(s) take over hydropower plant(s) or enters into new contract(s).

Royalty energy commitment from concessionaires on extended concession

period.

7. Policy Compliance

a. Policy provision of deposit of 1% royalty in cash annually to the Ministry of

Agriculture and Forest for conservation of integrated water resource

management needs to be implemented.

b. Compliance to national employment policies and laws appear weak and

needs strengthening. This has become crucial given the dire situation of

unemployment in the country and youth unemployment in particular.

c. Section 14.1 under exclusion of BSHDP 2008 needs to be re-aligned

recognizing that anything outside of a clear policy or law will need the

support of Parliament before acted upon.

d. Procedural and criterion framework for the use of rehabilitation,

resettlement and local development plan fund requires to be drawn up. It

needs to incorporate consultative procedure with the local development

committee as the policy requires.

e. Institutional responsibility for social impact assessment is found lacking

unlike for environment where NEC has been mandated. It requires clarity in

mandate and responsibility.

39

8. Land and Compensation

a. There are visible instances where the Land Act of Bhutan 2007 has been

disregarded by implementing agencies. The Land Act of Bhutan 2007 and

its provisions concerning acquisition of private lands for public and national

purposes must be followed strictly. Laws once passed must be respected

and if provisions found unsuitable, it must be amended but cannot be

ignored.

b. Compensation measures need realignment concerning affected private lands

in order to dissolve away increasing sentiments of unfair compensation

among the public.

c. Compensation to affected parties (private lands) needs consideration

(hydropower projects and its ancillary works).

40

Bibliography Bhutan 2020: A Vision for Peace, Prosperity and Happiness Bhutan Renewable Energy Policy

Copy of a DPR and TDR

Electricity Act of Bhutan, 2001

Eleventh Five Year Plan documents

Environmental Assessment Act of Bhutan, 2000

Foreign Direct Investment Policy, 2010

Government’s annual reports to Parliament,

http://water.usgs.gov/edu/hydroadvantages.html.


Labour and Employment Act of Bhutan, 2007

Land Act of Bhutan, 2007

Land Compensation Rates- 2009, Department of National Properties, PAVA

Memorandum of Understandings (MoUs) with GoI

MoEA, 2010. Economic Development Policy of the Kingdom of Bhutan 2010. Ministry of Economic Affairs. Royal Government of Bhutan

National Employment Policy , 2013

National Environment Protection Act of Bhutan, 2007

Policy documents on REAP & RISE

Royal Monetary Authority Annual Reports

SAARC Framework Agreement for Energy Cooperation (Electricity)

The Constitution of the Kingdom of Bhutan 2008

The Financial Services Act of Bhutan 2011

http://water.usgs.gov/edu/hydroadvantages.html


41

The National Council Act of the Kingdom of Bhutan 2008 (Consolidated)

Water Act of Bhutan, 2011

42

Annexure 1

The Hydropower Development can be summarized as follows:

The signing of a Memorandum of Understanding (MoU) between investor and the MPI to conduct feasibility study.

Proceed with feasibility study.

Presentation of feasibility study results.

Negotiation of Concession Agreement (CA) between investor and the RGoB led by DHPS.

Submit Environmental Impact Assessment (EIA) report for approval to WREA.

Negotiation of Power Purchase Agreement (PPA) between investor and power purchaser (following the signing of the CA and EIA approval).

After the signing of PPA, private investor will start with necessary preparation for dam construction both technically and socially (regarding resettlement, compensation)

Project Process within 5000MW

i. Umbrella Agreement(UA) 5000 MW ii. Government directive issued on hydropower development iii. List of viable projects drawn up for Government iv. List of viable project options presented to EJG v. GoI identifies Consultants, PSUs and JV partners vi. Preparation of Detailed Project Report vii. Vetting done by CEA and approval by Ministry of Power, GoI viii. Setting up of field office (CEA, CWC, GIS and DHPS) ix. Consultations : socio-economic and environmental assessment (EIA) x. Technical vetting – CEA and CWC of India xi. Approval by Ministry of Power, GoI xii. Investment clearance by Ministry of External Affairs, GoI xiii. Vetting by Public Investment Board xiv. Approval by Cabinet, GoI xv. Note moved by Ministry of Economic Affairs to Cabinet, RGoB xvi. Implementation Agreement signed xvii. Project authority established and incase of JV, Shareholder

Agreement and then Incorporated

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Annexure 2: Hydropower Project Planning/Implementation Stages and party engagement SL

# Stages What Happens?

Who is INVOLVED?

WHAT it DOES?

1

Reconnaissanc

e Study (RS)

1. Study topology and the terrain of the river basins from the topographical &google maps, satellite images (where available) etc. 2. Study the limitations on upstream & downstream of the river stretches 3. Select tentative project layout alternatives 4. Study project hydrology 5. Make field visit to verify the alternatives and also to study the rock, geology & site conditions of the alternatives 6. Prepare RS Report

1. DHPS, MoEA with assistance from Consultants

When it’s done through Consultants, DHPS officials are fully engaged. Reports are reviewed & scrutinized for conformance with the requirements

2. DHPS by itself

DHPS executes the studies by itself.

2

Prefeasibility

Study

1. Undertake topographical survey of the project area (intake, Head Race Tunnel, Power House, Surge&Pressure Shafts, Tail race Tunnels etc. at

appropriate scale (1:10,000, 1:5,000) 2. Geological Mapping/Investigations to study the rock characteristics and overall geomorphology of the project area 3. Study the hydrometeorological aspects of the project/river/catchment. This is important to explore the catchment features, rainfall pattern, project area hydrological cycle, river flows etc. 4. Conduct geotechnical investigations to study the surface & sub-surface conditions of the project components by way of making drill holes and through deployment of seismic refraction testing 5. Carryout initial Social & Environmental Impact Assessment studies (ISEIA) to ascertain the likely social & environmental risks/impacts that may outcrop as a result of the project implementation 6. Prepare PFS level designs (Civil, electro & Hydro-Mechanical 7. Study Transmission Network Analysis to propose the power evacuation routes/lines, Line types & voltage levels as well as to recommend the construction power requirements & arrangements 8. Undertake the project cost estimations and the corresponding financial & Economic Analysis 9. Prepare & submit PFS Report

1. DHPS

DHPS leads the PFS with assistance and support from other relevant

agencies like DGPC, BPC, DHMS and NLCS etc. It compiles reports and consolidates

2. DHPS through Consultants

DHPS fully engage its officials both at site and in office for transfer of knowledge as well as to quality checking. Reports are reviewed and comments incorporated.

3. Entrust to DGPC with Govt. Approval

DGPC prepares PFS & submits to DHPS which in turn scrutinizes their findings. NOTE: DHPS applies Multi-Criteria

Analysis (MCA) to rank & select the best projects for next level of investigations. Upon selection, RGoB's approval is sought to take it for next level of studies.

3 Preparation of Detailed Project Report (DPR)

1. Alternative Studies: Study & evaluate dam alternatives, alignment of water conductors, surge& pressure shafts, PH, TRT etc. 2. Topographical Survey: All project components must be surveyed on requisite scale at the DPR level 3. Geological Investigations: Geological mapping of all project components & rock & geology conditions of project area must be thoroughly studied &

reported 4. Geotechnical Investigations: Detailed surface & sub-surface conditions of the project components are studied through core drilling, exploratory drifting, seismic refraction testings and adequate testing are undertaken 5. Seismology: Historical Seismic data shall be reviewed so that project parameters can be designed accordingly

1. DHPS through GoI Consultants (WAPCOS, NHPC, SJVN, THDC etc.) _ EJG comes into picture to

expedite and speed up the DPR processes & approvals

DHPS engages fully with the Consultant officials for the investigation works. Overall coordination works undertaken like compilation of RGoB views/comments/suggestions to the

draft report. Upon approval by GoI, the DHPS processes and seeks Ministry's and subsequently RGoB's clearance on the DPR Report. The project is then considered ready for construction.

44

6. Hydro-Meteorology Study: Detailed hydrological analysis must be carried out to ascertain the water flow & catchment characteristics of the project. rainfall, temperature, humidity, flow & discharge must be compiled and studied 7. GLOF: Studies of upper catchment area must be undertaken so that advance flood warning mechanisms as well as suitable flood outlet gates can be designed for the project 8. Construction Material Survey: A thorough survey of CMS like rock quarry, aggregates, sand, clay, river shoal etc. must be undertaken along with adequate testing of the materials 9. Communication Survey: Studies of existing road network, bridges etc. must be done to ascertain which will need expansion for the purpose of

project 10. Transmission Network: detailed studies to decide on voltage level, no.

of lines for power evacuation must be done. Also, the construction power requirement and how to arrange it must be clearly spelt out 11. EIA/SIA: Comprehensive environmental & social impact assessment studies must be undertaken to study the likely risks that may arise from the project implementation. Study should clearly specify the monitoring & management mechanisms of such risks and also the compensation packages for the affected. 12. Optimization: Studies must be done to decide on the most optimal firm power, installed capacity, energy, unit sizing, techno economic viability, and other parameters concerning the project 13. Infrastructure Survey: Detailed studies of access roads, project colonies, bridges, schools, health facilities, contractors’ sites, muking places etc. must be studied & delineated 14. Construction Methodology: A clear Construction Methodology has to be studied and recommended for project implementation 15. DPR Reports: Adequate and qualitative no. of DPR report must be submitted which will be further circulated to the relevant stakeholders review and finalization

2. Entrust to DGPC with Government approval

DGPC prepares the DPR through involvement of their manpower along with contractors. The DHPS reviews the report and communicates the comments/views on the draft report. Once it’s done, the DHPS seeks Ministry's&RGoB's clearance for implementation. Note: If implementation is through IG, than DHPS works towards formation of project authority. If through PPP,

DHPS assist and guide DGPC through policy directives and other aspects

concerning project implementation.

4 Pre-construction

1. Review the DPR reports 2. Construction of project infrastructures like access roads, bridges, colonies

3. Preparation of tender documents for Main Packages (MP)

4. Recruitment of project staff & mobilization of resources (through procurement or hiring etc.)

If implemented through IG Model than

DHPS/Project

Authority

DHPS assist Authority with project familiarizations, gives policy directives, solves bottlenecks, facilitates it with

other govt. agencies etc.

DGPC/DHPS if PPP Model

Initiates and coordinate infrastructure works. DHPS offers policy directives and guidance.

45

5 Construction 1. Main Civil (MC-1) Package: Its involves construction of project intake structures, de-silting chambers, diversion tunnels etc. 2. MC-II: Involves construction of HRT, Surge & Pressure shafts MC-III: Involves construction of Power House and its associated works (E&M, Transmission Lines etc.)

Project Authority/ DHPS

IG Projects will be fully overseen by a Authority appointed by the RGoB&GoI. All policy directives and guidance will be through DHPS/MoEA. DHPS facilitates all bottlenecks for projects implementation

DGPC/DHPS DGPC may form a separate management to oversee the project implementation. Such management will still need policy directives from

DHPS

6

Delivering 1. Transfer of project and redeployment of project resources which includes i. Training customer, ii. Transfer documents, release of resources, release of staff and lessons learned

Project Authorities/ DGPC/DHPS Missing in BSHDP

7 O&M

Daily operation & maintenance of the hydropower plants DGPC

46