India’s Hydropower Investments in Bhutan: Environmental Impacts and the Role of Civil Society

[ Cross posted from the Hindu Business Line, April 26th 2016]

India is jostling for space in the global marketplace with other rising powers and needs robust energy supply to compete effectively. Implementing new power projects to harness domestic natural resources is one way to achieve this. However, in India, large-scale infrastructure projects have been hard to undertake due to their perceived adverse social and environmental effects. Today, strong internal environmental regulations and an activist civil society have raised the costs of implementing such infrastructure projects within India.

In this context, it is not surprising that India is looking to international markets to service its growing energy needs. Experiences from across the globe suggest that firms — whether state-owned or private — will opt to invest in countries where national regulatory frameworks are most conducive to business. India’s decision to support investments in large-scale, low-cost hydropower in Bhutan is a case in point.

Bhutan, landlocked and sandwiched between Sikkim and Arunachal Pradesh, has significant potential for hydropower production. Together with an enabling business environment, the absence of an active judiciary and a relatively nascent civil society makes it a seemingly ideal destination for Indian energy investments.

What makes India’s energy investments in Bhutan unique, however, is its professed commitment to a set of organising principles now popularly framed as ‘South-South Cooperation’. As a key development assistance provider from the Global South, India believes that its development partnerships with other countries in this grouping must align with the principles of respect for national sovereignty, equality, non-conditionality and mutual benefit.

The first hydropower project supported by India (Chukha, 336 MW) was completed in 1988; over 80 per cent of the power it subsequently produced has been exported to India. India’s domestic demand for hydropower has increased dramatically since then, prompting a search for innovative financing tools.

India has promised to help Bhutan install power plants that will generate 10,000 MW of hydropower by 2020. In the early years, India provided funding to Bhutan as part-grant, part-concessional loan. However, this model was considered to be unsustainable as it relied solely on public funds from both countries.

To address this issue, and to meet its ambitious 2020 target, India has proposed a new ‘Joint-Venture’ (JV) model to raise funds for its hydropower investments in Bhutan. The JV model is a partnership between public sector undertakings of both India and Bhutan, with 70 per cent of finances to be raised as company debt, and 30 per cent to be equity from India. The latter contribution was initially intended to be shared equally by both countries, but upon Bhutan’s refusal to do so, India agreed to pay Bhutan’s 15 per cent share as a gesture of goodwill. There are currently 10 projects in various stages of progress under this model.

Another model that has been proposed is the public-private partnership (PPP). The Dagachhu project, a JV between Tata Power, Bhutan’s DGPC, and the National Pension and Provident Fund of Bhutan (NPPF), is Bhutan’s first PPP for hydropower development. Co-financing partners include the Asian Development Bank, Austria’s Raiffeisen Bank and the NPPF, making this a truly multi-stakeholder initiative.

This partnership will allow Tata Power Trading Company, an arm of Tata Power, to sell the power generated from the Dagachhu project to the Indian energy market. The PPP model thus offers India a way to support hydropower development in Bhutan without relying solely on its own finances. It is evident that a variety of sophisticated financing modalities, untied to any kind of political conditionality, has allowed India to pay for Bhutan to produce the electricity India needs to service its own economy.

In exchange, Bhutan profits from the revenues generated from selling this electricity to India, which, in turn, enables it to offset any unfavourable trade imbalances. It would seem, therefore, that India’s energy partnerships with Bhutan align with the basic principles of South-South Cooperation. On closer scrutiny, however, it seems that the actual implementation of these projects is not always guided by the values of mutual benefit and equality, especially with regard to Bhutan’s environment.

Despite Bhutan’s strong environmental and biodiversity protection regime, there have been irregularities regarding environmental impact assessments conducted by Indian agencies, resulting in decisions that are not always environmentally sound. For example, the construction of the Punatsangchhu-I (1,200 MW) and II (1,020 MW) power projects has allegedly jeopardised the habitat of the endangered white-bellied heron.

Some hydropower projects supported by India in Bhutan have also had adverse effects within India itself. For example, excessive releases from the Kurichhu (60 MW) project had severely damaged the downstream Manas National Park, a World Heritage Site, in 2004. Anticipating similar levels of destruction resulting from the Mangdechhu (720 MW) power project, which is also upstream of Manas, the World Heritage Committee has twice requested Bhutan for information on the estimated impact of this project.

Further, not all power projects have benefited the Bhutanese economy. It is primarily Indian companies that are subcontracted to conduct project work, often relying on Indian labour. Bhutan Chamber of Commerce and Industry President Ugyen Tshechup has remarked, “On the one hand, the government talks about giving equal opportunity and sharing the benefits equally. On the other hand, they give everything to foreigners.”

Hydropower is an essential and irreplaceable component of Bhutan’s strategy toward green socio-economic development. However, the judiciary and civil society in both countries should scrutinise the social and environmental impact of these projects, and create appropriate mitigation and accountability measures.

India must exercise leadership since it is ultimately responsible for generating these impacts. India must ensure that its investments in Bhutan, or in any other country in the Global South, align with the same standards that projects within the country meet. Adhering to these standards will help to strengthen and further legitimise the principles of “South-South Cooperation”

As India’s economy grows and its search for resources to fuel this growth continues, its development partnerships will expand in scale and geographical reach. Developing clear regulations that outline India’s strategy towards its investments overseas and institutionalising the principles of South-South Cooperation will be critical to ensuring that relationships with other countries in the Global South remain harmonious.

[ This article was commissioned by the Centre for the Advanced Study of India at the University of Pennsylvania and is also available on their blog. ]