Mekong Utility Watch

Rent-a-river, build a dam

Grainne Ryder and Steve Rothert
World Rivers Review
December 1, 1994

The river auction has commenced. The Lao PDR government has taken its first steps down a seductive but treacherous path to prosperity and development: renting its rivers for hydroelectric dams. Laos has signed dozens of agreements to lease sites on every major river in the country to foreign companies for hydropower that will in turn be exported to Thailand. As it embraces a private investment approach for what have long been publicly-funded projects, the country hopes to free itself from a future of crippling foreign debt.

Traditionally, financing hydropower projects requires cash-starved countries such as Laos to take out large loans from multilateral lending institutions such as the World Bank. Though the old strategy allowed the government the benefit of retaining control of its land and natural resources, traditional debt financing could crush Laos’ fledgling economy if the hydropower program is to be carried out as aggressively as some officials hope.

The vision of harnessing the power of Lao rivers began in earnest in the 1970s, when the Lao government, the Mekong Committee, and foreign consultants surveyed the entire country in search of suitable dam sites. The country’s tropical, mountainous terrain was rife with good locations, many of them making it onto a list of more than 50 approved sites.

Money was what Laos needed to exploit the sites — and lots of it. Developers devised a complex funding mechanism whereby Laos would share the financial burden and potential profit with foreign developers.

But even the relatively small financial commitments from the Lao government proved an obstacle to achieving the government’s stated goal of 23 dams by 2010. Consequently, the cost-sharing concept was taken one step further, by limiting Laos’ financial involvement in some projects to a minor share, or possibly, to the provision of the site itself.

The projects were initially known as BOOT dams, that is “build, own, operate, and transfer”, a term later simplified to BOT, “build, operate, transfer.” Under a BOT scheme, the Lao government first offers up the country’s suitable dam sites for bidding by foreign engineering firms. Contract-winning companies would raise the vast majority of capital for construction, and the firms would build, own, and operate the facilities for a set period ranging from 20 to 30 years until they reached an agreed upon profit target. At the end of the contract period, ownership of the projects would be transferred to Laos, theoretically “free of charge.”

Industry professionals warn, however, that in practice the transfer of ownership will not be free, or even certain. There is little financial incentive on the part of the owners to build projects to standards that assure their smooth operation beyond the time when the transfer takes place. After operating for decades, the facilities are likely to need extensive work to rectify exhausted turbines, degraded civil works and silted reservoirs. The cost of such repairs could erode the projects’ profitability to the extent that the Lao government cannot actually afford to assume ownership.

The Swedish International Development Agency (SIDA), a long-time Mekong Committee donor, is highly critical of the BOT approach in Laos, warning that it poses “an imminent danger of the country losing control over the exploitation of one of its major natural resources.” Instead of a “rent-a-river” approach, SIDA recommends strengthening the state utility, Electricite du Laos (EdL), in order “to safeguard national control over hydropower resources and to avoid fragmentation of the electricity sector.”

EdL Project Department Chief Viraphone Viravong seems to agree. He would prefer to have kept the traditional development approach because it “would have given our government full ownership and authority over the project. We realize that the private sector will only want to maximize their own profits.”

Yet, the World Bank and the Asian Development Bank have been promoting the BOT model of investment as a way to raise the capital necessary for infrastructure projects in the Mekong region. The promotion seems to be working. There are already 13 formal contracts signed and 17 informal agreements between Laos and companies in South Korea, Australia, the United States, Norway, Canada, France, Thailand, and Sweden.

Despite the early interest shown by foreign investors in BOT schemes, even BOT’s vociferous supporters recognize that all is not as bright as it should be for the projects to move ahead. World Bank analysts concede that without huge subsidies and guarantees from donor governments, private investors are reluctant to invest in big dam projects. Construction period and cost overruns, poor performance, and the rising costs of resettlement and rehabilitation programs all contribute to the growing insecurity of private sector financiers.

There are practical problems, too. So far, commercial banks have been unwilling to offer hydro-loan payback periods that are long enough to allow BOT investors to reach their profit targets. Thailand’s leading English-language daily, The Nation, reported in November 1994 that the maximum payment period offered by commercial banks was 15 years, while investors insisted that periods of at least 20 years were necessary to reach profits before transferring the projects to government ownership.

In countries where public opposition turns large dam projects into political liabilities, private investment will be most difficult to secure. But in Laos, where environmental laws and citizens’ rights over resources are still ambiguous, the “rent-a-river” strategy has so far convinced the important powers to maintain the Rivers For Rent course. If the ambitious program moves ahead, it is difficult to predict who, if anyone, will be held accountable for the loss of hundreds of square kilometers of forest and agricultural land, the displacement of communities, and the fragmentation of a biologically rich ecosystem.


Categories: Mekong Utility Watch

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