Mekong Utility Watch

World Bank Approves Guarantee Mechanism to Protect Private Deals With Risky Third World Governments

Probe International Mekong Press Backgrounder #6

June 3, 1997

World Bank Approves Guarantee Mechanism to Protect Private Deals With Risky Third World Governments

The World Bank’s Executive Directors have quietly approved a new guarantee mechanism to protect commercial lenders that make joint investments with governments in some of the world’s poorest countries. The new guarantee mechanism is unchartered territory for the World Bank. It is designed to make large power and infrastructure projects attractive to commercial lenders in high-risk countries with governments that are considered uncreditworthy.

The guarantee mechanism was initially designed by Bank staff for the Nam Theun 2 hydropower project in Lao PDR, following nearly two years of deliberations with its Australian-led developers. If applied, the World Bank would pay commercial lenders to Nam Theun 2 a portion of what they are owed by the project owners (the Lao government and its private sector partners) if the owners cannot service their debt due to war, civil disturbances, expropriation, violation of concession contracts or other forms of government interference.

Whether or not this guarantee will be used for the US$1.5 billion Nam Theun 2 project is still uncertain. In a telephone conversation with Probe International last week, a spokesperson for Canada’s Executive Director to the World Bank, Leonard Good, doubted the mechanism would be used for a project as controversial as Nam Theun 2, adding that the Directors’ decision to approve the guarantee mechanism “should in no way be seen as support for Nam Theun 2.” Furthermore, he added that the project “is nowhere near coming to the Board [of Directors]” for approval.

Two years ago, the World Bank advised the Nam Theun 2 developers to produce resettlement and environmental management plans before it would consider providing a guarantee or soft loans for the project. Since then, the Bank has sent dozens of staff and consultants to the Nam Theun 2 developers’ aid but detailed plans are nowhere in sight. According to one World Bank advisor, the process has been “a disaster from start to finish.”

Nam Theun 2 was dealt a blow earlier this year when the Electricity Generating Authority of Thailand (EGAT), the sole prospective buyer, announced its decision not to purchase power from Nam Theun 2 until at least the year 2004. Oddly, World Bank staff contacted by Probe International were unaware that the Nam Theun 2 developers have no customer for their electricity.

If completed, Nam Theun 2 would flood nearly 500 square kilometres of forest and farmland near the Lao-Vietnamese border, displace more than 5,000 people, including Makong and Thai Bo minority communities, and disrupt two productive river systems upon which dozens of farming and fishing communities depend.

Developers of the 680-megawatt Nam Theun 2 hydrodam include the government of Lao PDR (25 %), Australia’s construction giant, Transfield (10%), the state-owned utility, Electricite de France (30%), and Thai companies, Ital-Thai Development (15%), Phatra Thanakit (10%), and Jasmine International (10%).

Categories: Mekong Utility Watch

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