India’s new hydel push can’t turn blind eye to Teesta III failures

In part 2 of this series, CarbonCopy explores how India is pushing for dams with a broken system, one that creates winners and losers as seen in the aftermath of Teesta III. Read the first part here.

Over the past 20 years, India has embarked on multiple dam-building pushes.

It is currently on the cusp of a fresh dam-building drive. As CarbonCopy has written earlier, the BJP-led NDA government wants to boost India’s hydel capacity to 70,000 MW from the current 45,700 MW. This drive differs substantially from previous dam-building pushes in the past two decades.

Given the private sector has struggled to convert MoUs into hydel projects, the NDA is again banking on public sector undertakings. The 29 dams proposed for Arunachal Pradesh, for instance, have been shared between National Hydel Power Corporation (NHPC), North East Electric Power Corporation (NEEPCO), THDC (formerly, Tehri Hydro Development Corporation) and SYVN (Satluj Jal Vidyut Nigam). Each gets a river basin. 

But while chasing investment and faster additions to installed power generating capacity, the country has also weakened environmental safeguards and qualifying parameters for firms vying to build these.

Local leaders lobby for hydel projects in their constituencies. Brokers make money connecting hydel companies with officials and politicians. Given the prospect of rents from construction work, politicians across states like Arunachal Pradesh, Sikkim, Uttarakhand and Himachal Pradesh have signed more MoUs than their states’ estimated hydel potential. 

In tandem, eyeing high returns from hydel power, a clutch of firms have scrambled to bag MoUs. Almost all were neophytes in the dam-building space.

Eighteen years after the country liberalised power generation, it’s useful to study what such systems have produced. Its primary output, as this report will argue, is a skewed distribution of risks and rewards. Teesta III illustrates that point to perfection.
For that reason, as India embarks on a fresh dam-building push — not to mention the country’s pumped storage push — there are lessons to be learnt from its collapse at Chungthang.

Nipped in the bid

At 1,200 MW, the biggest dam proposed in Sikkim was Teesta III. The next biggest, 520 MW Teesta IV was less than half its size. 

Bidding out the project, the state government ended up with a short-list of five companies. NHPC; a consortium of Cosmos Electric Power Supply; Reliance; Sutlej Jal Nigam Vidyut; and Athena Advisors (which subsequently became Athena Projects). Of these, two were PSUs with experience in dam-building. Athena was a young company. It had been incorporated just two months earlier—in August 2004.

In October 2004, the Cosmos consortium, promoted by former ITC chairman KL Chugh, was chosen for Teesta III.

And then, something odd happened. On October 18, 2004, four days after the Sikkim Power Department recommended Teesta III be alloted to Cosmos, a director in the company sought changes in the contract. Neither Chugh nor the other consortium members, as Current News reported, had signed on this letter. The firm, nonetheless, lost the project.

On February 21, 2005, a new Cabinet note said Teesta Stage III would go to Athena. By this time, the firm had entered into a joint venture with L&T, PTC, IL&FS and Andhra Pradesh Genco, a State PSU. The last of these deserves a comment. An Andhra government PSU had tied up with an unknown company trying to snag a hydel MoU in distant Sikkim.

This grouping, nonetheless, worked in Athena’s favour. The presence of “four experienced consortium members” had helped, said a 2017 CAG report into Teesta Urja. After winning the bid, Athena Projects incorporated Teesta Urja Ltd as the JV that would execute the project. In its Memorandum of Association (MoU), however, APGenco, L&T and IL&FS weren’t listed amongst the shareholders. “Three of the four consortium members… having technical experience in the field had exited from the consortium without the prior permission of the State Government,” noted the CAG report. “In absence of technical expertise for design and engineering, TUL had to employ consultants i.e. M/s Energy Infratech Private Limited for the project.”

The state government of Sikkim—which had to get 26% in the consortium—was missing as well. The majority shareholder, with 49,300 shares out of 50,000, was Athena Projects.

State of denial

These changes went unchallenged by the state government. 

Thereafter, as the first part of this series said, a clutch of institutions – like WAPCOS, which conducted the EIA study; the Central Electricity Authority (CEA), which granted techno-economic clearance; the then-NEAA (National Environment Appellate Authority), which dismissed a subsequent appeal by the Affected Citizens of Teesta—okayed the project.

This writer contacted Wapcos asking about its report’s findings re: GLOFs. Chamling, too, was asked if his state government validated the technical expertise of Energy Infratech. This article will be updated when they respond.

Work began. Despite the existence of a glacial lake just 50 km away and the absence of long-term rainfall data, Teesta III’s spillway capacity had been set at 7,000 cumecs. “7,000 cumecs is barely sufficient for rain-induced floods,” a CWC official told Sunday Guardian. “A GLOF demands spillways of much higher capacity.” Once construction started, it tried to unilaterally lower spillway capacity to 3,000 cumecs – a measure blocked by the CEA and the CWC.

This writer contacted Shahi asking for his comments. In his reply, he said it would be “difficult and probably improper to respond since Sikkim Govt has already set up an enquiry on these issues.”

In 2009,  Teesta Urja’s ownership changed. Asian Genco, based out of Singapore, became its new holding company. Three connections—one political, two bureaucratic—need to be flagged here. Asian Genco has been linked to Jagan Mohan Reddy, the son of former Andhra CM YS Rajshekhar Reddy—and the current CM of Andhra Pradesh. Energy Infratech, incidentally, is a subsidiary of Asian Genco. In 2007, RV Shahi, power secretary at the time India liberalised power generation, had become its chairman. According to Current News, DD Pradhan joined Abir Infrastructure, which owns East Coast Energy in partnership with Asian Genco.

Shortly thereafter, two consequential deals followed. In 2010-11, Athena picked up 49% in Sikkim Power Development Corporation (SPDC), the state-owned enterprise which held 26% in independent power projects coming up in the state. The deal gave Athena influence—even a place on the board—over all dams (over 25 MW) coming up in the state, even those being built by rival firms, and put it in a position to control the state’s power output.

Around the same time, a clutch of global FIs, led by Morgan Stanley Infrastructure Partners, bought close to 49% stake in Asian Genco for $425 million (about ₹1,900 crore at ₹45 to the dollar. Of this, say media reports, about ₹1,200 crore went to Teesta Urja).

Teesta III was a key reason for this investment. “(Asian Genco) is developing an investment portfolio of hydro, thermal and non-conventional generation assets for an aggregate capacity of nearly 4,000 MW under construction and development,” says a press note on the Morgan Stanley website. “These assets include the largest hydro project, under advanced stages of construction, in the private sector in India (Teesta III: 1,200 MW) and a coal-fired, supercritical thermal project in the state of Andhra Pradesh (East Coast Energy Phase-I: 1,320 MW).”

By this time, however, geological risks had begun exacting their price from TeestaUrja. In June 2010, the dam site was hit by a landslide. Next September, Sikkim was hit by an earthquake. Its epicentre, in the Kanchenjunga Conservation Area, was just 70 km from Chungthang, which was amongst the worst-hit parts of Sikkim.

In the days that followed, locals held unrestrained blasting for dam-building primarily responsible for the damage, saying weakened buildings had fallen to the quake. 

While the company denied its blasting had affected houses, a study by the state department of mines, minerals and geology, published just that April, too, had linked cracks in local buildings to “blasting in close vicinity” at the Teesta III site, just 200-500 metres from affected settlements.

After the quake, while Teesta Urja denied its project had been damaged, fifteen of its workers died at the site. One of them, DD Gupta, had been inside a tunnel being excavated by the firm. After the quake, Teesta III slipped into delays. 

By September 2014, the cost of the project had nearly doubled, from ₹5,702 crore to ₹11,382 crore. What happened thereafter has not been explained well. 

Climbing costs, declining faith

In November 2014, as private equity investors in Asian Genco—including Morgan Stanley Infrastructure Partners and Goldman Sachs Asset Management—began complaining about delays at Teesta III and East Coast Energy’s thermal project, Chamling’s government bought out their stake in the dam.

It was an extraordinary moment. A tiny Himalayan state was helping some of the largest FIs in the world cut their losses. “The funds are recovering some of the money, which they have nearly written off,” a person familiar with the deal told Economic Times in 2015.

It’s possible the state government intervened to rescue its largest hydel project—and to belatedly develop it as a state undertaking. And yet, the transaction raises multiple questions.

According to CAG, Sikkim paid the FIs ₹8.53 per share—a total of ₹266 crore. It found this valuation problematic. The state government, it said, had bought these shares without doing its own “independent valuation”. Instead, it had accepted the price cited in an valuation report “prepared by TUL (Teesta Urja) through M/s Ernst & Young Merchant Banking Services Private Limited (EY) for internal management analysis purpose.”

In its response, the state government told CAG it lacked the resources to mount an independent valuation. This reporter wrote to Chamling asking him about the size of the transaction, and to explain the decision to buy back shares in Teesta Urja. This article will be updated when he responds.

Teesta III was eventually commissioned in February 2017. By this time, its fixed costs had climbed further, from ₹11,382 crore to ₹14,000 crore. Its cost of power now stood at about ₹6/unit instead of the original ₹1.92/unit. After Punjab, Haryana, UP and Rajasthan refused to accept the high cost power, its power began to be sold at less than ₹3 per unit. In a 2022 statement, the All India Power Engineers Federation slammed Teesta-III as a failed PPP. 

Even this sum, however, didn’t reach Sikkim. It, instead, went into repaying the loan Sikkim took to invest in Teesta Urja. “This is manageable during the monsoon period when the project runs to its full capability,” Sherpa said this July.

The rest of the year, the power generated is not enough to repay the loans and interest. “The state government has to take loans from the State Bank of Sikkim now and then to pay the loans,” state power minister MN Sherpa has said. 

“If we default, Sikkim Urja Ltd automatically becomes a Non-Performing Asset.” 

Flipped and flopped

Then came the GLOF.  Had Teesta III been insured well, it might have been a blessing for Sikkim. The state could have recovered its investment—and freed itself from the pressure to support the dam.

The project had indeed been insured for ₹12,000 crore. There was, however, a glitch. The policy covers earthquakes, not GLOFs. “The contract clearly says in case the project is damaged by (GLOF), the claims will be limited to ₹500 crore,” an official of a reinsurance company told Indian Express.

It gets worse. Of the 24 projects slotted by Sikkim for PPP development in the mid-2000s, just seven were completed. Between them, they added up to 2,158 MW of hydel capacity. With its largest power project, however, not contributing to the exchequer, Sikkim’s receipts from its hydel expansion stayed well below that targeted ₹900 crore—at ₹165 crore in 2022-23.

That number will plummet further now. Not only has Teesta III been washed away, two more dams—Teesta V (510 MW) and Dikchu HEP (96 MW)—have been damaged. That is 1,800 MW. That leaves the state with just 352 MW of functional capacity and, at 12% share of output, 42 MW to sell.

An unfair end

Teesta III was built by a private company. India’s new hydel push is led by state-owned enterprises. How applicable are these lessons? As JNU professor and chief economic advisor to the current Sikkim government, Mahendra P Lama, said in the first part of this series, Sikkim embarked on its giant hydel push without creating a “competent body in the state that (could) deal with such gigantic projects”. Today, even as India kicks off a new hydel push, such “competent” bodies are still absent.

Still around, instead, is the rent-seeking political economy around hydel projects. It determines who bags the hydel concession—or its subcontracting arrangements. It also determines the quantum of scrutiny from state institutions. 

In addition, even if large dams are being built by state-owned companies, India’s giant push for pumped storage projects (a 96,000 MW target, here) is led by private-sector companies, several of which are again chasing valuations — and have political links. Here, too, environmental scrutiny continues to be poor. 

That is the bigger picture here. Teesta III didn’t go down solely because of a GLOF or the absence of an earlier warning system. It collapsed because of a wider set of factors—starting with the political economy of rent extraction and speculation which has developed around the hydel sector in India—which resulted in a neophyte dam-builder bagging the contract; state agencies shrugging off their scrutinising function; and the state of Sikkim underplaying environmental risks.

It’s a construct that spawns a few winners and many losers. In the case of Teesta III, this distribution of risks and rewards is clear. Offloading equity in Teesta III, Athena had made its money. Selling their shares to Sikkim, the investors had cut their losses. Intermediary firms like Wapcos and Energy Infratech had collected their fees.

The people of little Sikkim, however, lost. They were first saddled with an unviable dam that needed cash infusions. After the GLOF, they paid an even bigger price. 

A week after the Chungthang collapse, the death toll stood at 75. Another 101 were missing. As many as 3,400 houses and 14 bridges had been destroyed. Over 6,000 people were living in rescue camps. The videos that emerged were poignant. In the early moments after the disaster, with the state missing, locals were leading rescue efforts.

Life, under an uncaring state. 

This is the second and final part in the series. Read the first part here.

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M Rajshekhar

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