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India in Transition

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

Supriya Roychoudhury & Shashank Srinivasan
April 25, 2016

India is jostling for space in the global marketplace with other rising powers and needs a robust energy supply to compete effectively. Implementing new power projects to harness its domestic natural resources is one of the ways this can be achieved. However, in India, large-scale infrastructure projects have been hard to undertake due to their perceived adverse social and environmental effects— controversial dam projects on the Narmada and Teesta Rivers being key examples. Today, strong internal environmental regulations and an activist civil society have raised the costs of implementing such infrastructure projects within India; for example, dams on the Nyamjang Chu in Arunachal Pradesh and the Barak in Manipur have both been delayed due to their perceived impact on the local ecology and on local communities, respectively.

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 the Indian states of 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 in the global marketplace, however, is its professed commitment to a set of organizing 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 megawatts [MW]) was completed in 1988; over 80 percent 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; in India’s case, to make grants, and in Bhutan’s case, to pay back loans.

To address this issue, and to meet its ambitious 2020 target, India has proposed a new “Joint-Venture” (JV) model to raise finances for its hydropower investments in Bhutan. The JV model is a partnership between public sector undertakings of both India and Bhutan, with 70 percent of finances to be raised as company debt, and 30 percent 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 percent share as a gesture of goodwill. There are currently ten projects in various stages of progress under this JV model.

Another model that has been proposed is the public-private partnership (PPP).The Dagachhu project, a joint venture between India’s Tata Power Ltd., Bhutan’s DGPC Ltd., 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 Raiffessen Bank and the NPPF, making this a truly multi-stakeholder initiative. This partnership will allow Tata Power Trading Company, a company of Tata Power Ltd., 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. From the examples provided above, 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 unfavorable 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 regards 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 (1200MW) and II (1020MW) power projects has allegedly jeopardized the habitat of the endangered white-bellied heron. While efforts are being made to create artificial habitats for these birds, the fact remains that their natural habitat is being destroyed, and mechanisms to ensure accountability remain weak.

Some hydropower projects supported by India in Bhutan have also had adverse effects within India itself. For example, excessive releases from the Kurichhu (60MW) power project had severely damaged the downstream Manas National Park, a World Heritage Site, in 2004. Anticipating similar levels of destruction resulting from the Mangdechhu (720MW) 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 (due to be commissioned in September 2017) on the park. As of last year, Bhutan had not yet furnished this information.

Furthermore, not all power projects have benefited the local Bhutanese economy. Anecdotal evidence suggests that it is primarily Indian companies that are subcontracted to conduct project work, often relying on Indian labor. Bhutan Chamber of Commerce and Industry President Ugyen Tshechup has remarked, “On one hand the government talks about giving equal opportunity and sharing the benefits equally. On the other hand they give everything to the 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 carefully scrutinize the social and environmental impact of these hydropower projects, and create appropriate mitigation and accountability measures. India must exercise leadership since it is ultimately responsible for generating these impacts. To that end, India must ensure that its investments in projects in Bhutan, or in any other country in the Global South, align with the same environmental and social standards that projects within the country are required to meet. Adhering to these standards will help to strengthen and further legitimize the principles of “South-South Cooperation” on which India’s development partnerships are premised. In the case of hydropower, mechanisms could be set up to ensure that Indian and Bhutanese civil society organizations are able to comment at various stages of the project approval process, and ensure that these standards are being met.

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 institutionalizing the principles of South-South Cooperation will be critical to ensuring that relationships with other countries in the Global South remain harmonious.

Supriya Roychoudhury is an independent researcher and commentator on South-South Development Cooperation issues. She previously led Oxfam India’s foreign policy programme and has a Masters degree in International Relations from the University of Warwick.

Shashank Srinivasan is a spatial analyst and cartographer working in India, and a graduate from the MPhil in Conservation Leadership program at the University of Cambridge.

India in Transition (IiT) is published by the Center for the Advanced Study of India (CASI) of the University of Pennsylvania. All viewpoints, positions, and conclusions expressed in IiT are solely those of the author(s) and not specifically those of CASI. IiT articles are re-published in the op-ed pages of The Hindu: Business Line. This article can be read here.

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