RENUKA RAI | Thimphu
Hydropower projects in Bhutan have emerged as the highest-risk sector in the nation’s public financial landscape, drawing significant attention in the Royal Audit Authority’s (RAA) FY 2024–25 audit report. With reported errors amounting to over Nu. 7.49 billion, hydropower projects account for the largest share of financial irregularities among all government agencies, reflecting both the immense scale of these projects and the systemic challenges that accompany their management.
While the figures may appear alarming at first glance, the RAA emphasizes that these irregularities are largely non-fraudulent, stemming from procedural lapses, inadequate reconciliation, and gaps in accounting practices rather than deliberate misconduct. This distinction is critical, as it highlights structural and operational weaknesses rather than pointing to corruption as the primary cause.
Over the past three fiscal years, the financial implications of irregularities in hydropower projects have grown sharply. In FY 2022–23, total irregularities across all audited agencies amounted to Nu. 2,840.092 million, and by FY 2024–25, this figure had nearly quadrupled to Nu. 9,987.242 million. Hydropower projects have consistently contributed the largest proportion of these irregularities, with the Punatsangchhu Hydroelectric Project Authority (PHPA) Phase II alone recording Nu. 7,789.653 million in errors. The concentration of irregularities within the hydropower sector is unsurprising, given the complexity and magnitude of these projects. Large-scale infrastructure initiatives involve multiple contractors, extensive coordination between government departments, and substantial financial outlays, all of which increase the potential for procedural and accounting discrepancies.
The audit findings indicate that much of the irregularities are associated with finance and revenue management. Within this category, hydropower projects accounted for more than 86 percent of errors reported. Discrepancies in outstanding liabilities, unsettled revenue sharing, differences in royalty and wheeling charges, and unresolved suspense account balances were recurring issues across multiple projects. For instance, the Mangdechhu Hydropower Plant had an outstanding liability of Nu. 281.350 million that, while cleared in practice, remained unrecorded in the accounting system. Similarly, revenue-sharing obligations from the Nikachhu project totalling Nu. 162.413 million remained unsettled at the time of audit.
The PHPA-I faced a suspense account discrepancy of Nu. 16.848 million pending asset verification, while royalty and wheeling charges at MHP showed differences of Nu. 166.159 million and Nu. 90.021 million, respectively. These examples underscore the challenges in reconciling operational records with financial accounts, particularly in projects with multiple revenue streams and complex contractual arrangements.
While the figures are significant, it is important to understand the context behind the surge in reported irregularities. The increase reflects, in part, the RAA’s expanded audit coverage and improved detection mechanisms. Furthermore, the RAA adopted a revised classification framework in FY 2024–25, under which irregularities are now categorized under “Errors” rather than traditional fraud or non-fraud classifications.
This framework distinguishes procedural and accounting errors from fraudulent activities, allowing for a more nuanced understanding of the challenges facing public sector projects. The overwhelming majority of reported irregularities—99.92 percent—fall under non-fraudulent errors, suggesting that the rise in reported amounts does not necessarily indicate increased corruption but rather more effective identification of existing gaps.
Systemic weaknesses appear to be a recurring theme in hydropower project audits. Delays in updating financial records, lack of proper documentation for advance payments, unreconciled accounts, and deviations from contractual terms are frequently observed. Public Works advances, for example, often remain unadjusted for extended periods, sometimes spanning multiple fiscal years. Similarly, reimbursements to consultants and contractors occasionally include expenses that fall outside the approved scope of contracts, highlighting procedural lapses rather than intentional misappropriation. The large scale and multi-year nature of hydropower projects exacerbate these challenges, as the volume of transactions and the number of stakeholders involved make timely reconciliation and accurate record-keeping more difficult.
The RAA’s evolving audit philosophy is evident in the way these findings are presented. Rather than focusing solely on punitive measures, the RAA is increasingly emphasizing early detection, systemic correction, and preventive measures. Audit reports are framed as tools for governance, intended to guide public agencies toward better financial management and accountability. In the case of hydropower projects, this approach highlights the importance of robust internal controls, timely corrective action, and continuous monitoring to reduce errors and improve transparency.
Despite the magnitude of reported irregularities, most financial statements from hydropower projects remain reliable, with only a limited number of qualified audit opinions issued over the past three fiscal years. This suggests that while procedural and documentation issues are widespread, the underlying financial reporting is generally sound.
The decline in cases referred to the Anti-Corruption Commission (ACC) further reinforces the distinction between errors and fraudulent activities. In FY 2022–23, nine audit findings were referred to the ACC, whereas in FY 2024–25, only four cases were escalated. This decline reflects the non-fraudulent nature of most irregularities and highlights the effectiveness of the RAA’s revised audit classification framework in distinguishing between errors that require administrative correction and those warranting legal investigation.
The significance of hydropower projects in Bhutan’s economy cannot be overstated. As major contributors to national revenue, employment, and infrastructure development, these projects are central to the country’s development agenda. However, the recurring financial irregularities reveal a pressing need for stronger governance mechanisms.
Strengthening internal controls, ensuring timely adjustments of advances and liabilities, and reconciling accounts in a structured manner are crucial steps to improve financial management. Integrating digital accounting solutions with project management systems could facilitate real-time monitoring, reduce manual errors, and provide a clearer picture of financial performance across all stages of project implementation.
The audit also serves as a reminder that accountability in public financial management is not merely a bureaucratic requirement but a cornerstone of public trust. By highlighting irregularities and recommending corrective measures, the RAA underscores the role of audits in safeguarding public resources. For hydropower projects, where the stakes are high and financial flows are complex, prompt action on audit recommendations is essential to maintain credibility and ensure that resources are effectively utilized for national development priorities.
The lessons from the FY 2024–25 audit should inform policy and operational decisions for future hydropower projects. Expanding training for accounting and financial personnel, standardizing documentation practices, and institutionalizing periodic reconciliations can significantly reduce procedural errors. Additionally, fostering a culture of proactive financial management, where discrepancies are identified and addressed early, will enhance the sector’s resilience and efficiency.
Bhutan’s hydropower projects represent both an extraordinary opportunity and a significant challenge in the realm of public financial management. The FY 2024–25 audit highlights that while irregularities totalling over Nu. 7.49 billion are substantial, they are largely non-fraudulent and indicative of systemic weaknesses rather than corruption. By addressing procedural gaps, strengthening internal controls, and adopting preventive measures, hydropower authorities can ensure better financial stewardship, safeguard public funds, and maintain the trust of citizens.
As Bhutan continues its ambitious hydropower expansion, the insights from these audits provide a roadmap for improving governance, enhancing accountability, and ensuring that these critical projects deliver maximum value to the nation.
