Dr. Nihar R. Nayak, Research Fellow, Non-Traditional Security Centre, Manohar Parrikar Institute for Defence Studies and Analyses (MP-IDSA),spoke on “Hydroelectric Power in Bhutan: The Strategic Partnership Model” at the Monday Morning Meeting held on 18 November 2024. The meeting was moderated by Dr. Opangmeren Jamir, Associate Fellow, Non-Traditional Security Centre, MP-IDSA. The Director General, Ambassador Sujan R. Chinoy and the scholars of the Institute participated in the discussions.

Executive Summary

Bhutan in the past has always avoided any kind of strategic partnership approach in its foreign policy. This approach has recently been changed with the introduction of the ‘Strategic Partnership Model’ (SPM) in Bhutan’s foreign policy which now describes Bhutan’s new framework for its future cooperation on hydro-power development projects. This new SPM could bring both challenges and opportunities for India-Bhutan bilateral relations.

Detailed Report

Dr. Opangmeren Jamir gave a brief introduction on various aspects of India-Bhutan relations. He mentioned that hydro energy cooperation has been an important component of India-Bhutan relations since 1974, when Chukha, the first hydropower project was commissioned. Dr. Jamir mentioned that over time both India and Bhutan have significantly benefited from hydropower projects but in recent years there has also been some discontentment on the Bhutanese side about issues of rising debt and lack of revenue generation from these hydropower projects with India. Questioning the feasibility and sustainability of undertaking such hydropower projects in Bhutan in future and highlighting other possible challenges these could bring out for the India-Bhutan relationship, Dr. Jamir invited Dr. Nihar R. Nayak to make his presentation on the subject.

Dr. Nihar R. Nayak started his presentation by highlighting some salient features of Bhutan in terms of its geographical landlocked location, high Gross National Happiness (GNH) index, increasing focus on developing hydro-power projects and its past isolationist foreign policy approach. Dr. Nayak highlighted that Bhutan in the past has always avoided any kind of strategic partnership approach in its foreign policy, but this approach has recently been changed with the introduction of the ‘Strategic Partnership Model’ (SPM) in Bhutan’s foreign policy approach to describe future cooperation on its hydropower development projects. Dr. Nayak described that there are multiple reasons behind this move. He pointed out that the first reason behind this has been Bhutan’s failure in achieving its Vision-2020 of producing planned 10,000 MW electricity. He mentioned that Bhutan’s Vision 2020 failed primarily due to delay in completion of the Punatsangchhu I & II, Kholongchhu projects, slow progress in the joint venture Hydropower Projects established with India through Indian Public Sector Undertakings (PSUs) and Bhutan in 2014, and as a result of cost overruns in these projects. Dr. Nayak mentioned that the second reason for the adoption of the Strategic Partnership model in Bhutan’s foreign policy approach has been its rising debt to India. He pointed out that as of 2023, hydropower debt accounted for nearly 70% of Bhutan’s external debt and over 80% of its GDP.

Dr. Nayak pointed out that in order to achieve the objectives of its new ‘Vision 2040’, that includes massive targets of producing 20,000 MW of electricity from hydro-electric plants, Bhutan would require US$26 billion. Therefore, in order to meet these massive objectives, Bhutan’s SPM calls out to renowned private companies to make investments in Bhutan’s hydro-power projects as junior partners. Dr. Nayak mentioned that the new SPM calls for gathering funding for the new hydro-power projects via undertaking the financial model of 70 percent debt and 30 per cent equity route. For raising the equity funds, the plan includes creation of a new company with the help of the strategic partners. Dr. Nayak highlighted that as per this model the private companies would not be entitled to have any ownership, thereby guaranteeing Bhutan’s first ownership over these projects. Dr. Nayak emphasised that through this SPM Bhutan seeks long-term power purchase agreements with joint venture partners in these planned hydro-power projects.

In the second part of this presentation Dr. Nayak highlighted various benefits and challenges of implementing the new SPM model for Bhutan. Dr. Nayak mentioned that when it comes to the benefits, the SPM model seeks to ensure secure financing for Bhutan’s new hydropower projects at competitive rates. Through this model Bhutan aims to reduce its risk of dependency over one country. Dr. Nayak pointed out that through this new SPM model Bhutan further seeks to ensure efficient project execution, innovation and greater investment in its hydro-power projects. Finally, SPM seeks to augment Bhutan’s greater leverage in negotiating the unit cost of electricity and enabling the country with improved technology that is both eco-friendly and capable of generating higher energy thereby enhancing Bhutan’s future energy and economic security.

Dr. Nayak stated that despite this optimism, several challenges also remain. He pointed out that though this new document highlights multiple opportunities, Bhutan in the near future could struggle for securing the required funds needed for the execution of its projects at low interest rates. Dr. Nayak brought out that in the near future climate change could emerge as another important factor in the smooth execution of these projects. He warned that as a result of climate change Bhutan could witness 1.4 percent drop in its GDP by 2050 which would further make securing of the required US$26 billion (for execution of its hydro-project as highlighted in its Vision 2040 document) more difficult when the current GDP of Bhutan is just around US$3 billion.

In the final part of his presentation, Dr. Nayak highlighted several positive implications of Bhutan’s SPM for India-Bhutan relations. Dr. Nayak mentioned that Bhutan’s SPM would shift existing cooperation on hydro-power projects between two countries from just ‘Government to Government’ (G2G) level to ‘Public-Private Partnership’ (PPP) model. Such a model could bring efficiency and positive outcomes in the form of timely completion of projects, more transparency etc. and would further strengthen India-Bhutan relations. Dr. Nayak finally highlighted that Indian companies increased private investment in Bhutan’s hydro sector could reduce Bhutan’s financial obligations to the Government of India and such a model could also emerge as an important tool for effectively managing the issue of surplus electricity by 2040.

Questions and Comments

Post his presentation, Dr. Opangmeren Jamir invited Ambassador Sujan R. Chinoyto make his comments on the subject. Dr. Jamirlater opened the floor to the participants for their comments and questions.

Amb. Sujan R. Chinoy complemented Dr. Nihar R. Nayak for making a detailed presentation on the subject. Amb. Chinoy asked Dr. Nayak the reasons behind Bhutan’s failure in achieving its Vision 2020 targets. He also asked the Speaker to comment on the role of states like China (if any) in influencing Bhutan’s foreign policy decision-making. Amb. Chinoy questioned Dr. Nayak about the possible options available with Bhutan to secure its funding for execution of its planned future hydro-electric projects. He called upon Dr. Nayak to undertake a small fast-track project on the subject and do a roundtable in upcoming months at MP-IDSA, with due involvement of all the stakeholders on the subject.

Col. (Dr.) DPK Pillay, raised that issue of the non-involvement of Indian companies in development of Bhutan’s ‘Gelephu Mindfulness City Projects’. He asked the Speaker to comment on the reasons for that.

Gp. Capt. (Dr.) Rajiv Kumar Narang asked the Speaker to comment on the possibilities of any ongoing backdoor Chinese informal activities to spread anti-India sentiments in Bhutan. He also asked the Speaker to comment on whether any informal acts of influencing decision making in Bhutan are being undertaken by Chinese business or other groups.

Dr. Uttam Kumar Sinha, asked the Speaker to comment on the future long-term feasibility and sustainability of undertaking such massive hydro-electricity projects in the region. Highlighting impacts of climatic vulnerabilities to the region, Dr. Sinha mentioned that there is a need to undertake holistic assessments of the region prior to undertaking such projects in the region.

Dr. Nihar R Nayak gave detailed explanations to all the questions and comments raised.

Report prepared by Dr. Bipandeep Sharma, Non-Traditional Security Centre, MP-IDSA, New Delhi.