Mekong Utility Watch

Nam Theun future still cloudy

November 17, 1997

Seldom has an Asian electricity project been so dogged before it has been given the formal go-ahead as the 681 MW Nam Theun 2 dam project in Laos. But that is the case with this project in Laos’ central highlands, endorsed by the operations committee of the World Bank on October 31.

That said, World Bank officials emphasise several hurdles still to be overcome and many questions to be answered before Nam Theun 2 is submitted for board approval and before the project formally enters the Bank’s economic and technical phase.

Yet just this recent endorsement of initial environmental and social measures taken by the government and the project’s private developers – to wit, the establishment of a 3,500 sq. km Nahai Nam Theun National Biodiversity Conservation area in what will be the dam’s watershed and the resettlement of 4,400 people, as well as a preliminary assessment of the project’s economic impact – has sparked concern among several non-governmental organisations (NGOs) on economic, social and governance issues.

Ngo Zi Okanjo Iwella, the Bank’s country director for Laos told Power in Asia that as a result of the financial and currency crisis in Thailand – the country this is going to buy the electricity – a key issue in the dam project’s viability will be the price and conditions of the power purchasing agreement between Laos and EGAT, the Thai electricity utility, as well as the matter of how long it is going to take to negotiate this agreement.

“There are several risks,” commented Iwella. “There is the risk that the demand for power in Thailand could decline as a result of a slowdown in Thailand’s economic growth. Our estimates at the moment are that this decline in power demand could be around 11% to 12% a year, in which case there will be more than sufficient room for the proposed dam’s supplies.”

Under existing agreement Laos is committed to providing Thailand with 3,000 MW of electricity by 2006. The dam will go a long way towards fulfilling that commitment.

Meanwhile there is the crucial issue of what price Thailand, through EGAT, will be prepared to pay for the dam’s output. Iwella said that despite Thailand’s crisis,” the price of the Laos electricity should be quite competitive compared to the price of IPP power in Thailand.”

Although the independent power producers in Thailand are now renegotiating their contracts with EGAT – they are paid 100% in dollars – in the case of Laos, power payment may be 50% baht and 50% US dollars so the currency depreciation will not be so big, Iwella explained.

Nevertheless, before the project can be taken to the formal appraisal stage, “we will have to know the price that will be paid in the purchasing agreement,” she said. “We think the most likely risk in Thailand’s current circumstances is not that the dam project will have to be scrapped altogether but that there will be a delay of as much as two years before it is launched.”

Iwella’s views are not as pessimistic as those of the California based International Rivers Network, which issued a statement following the Bank’s endorsement of the project, claiming that the project was misconceived and that Thailand’s economic problems would only make the problems worse.

Aviva Imhof, the Mekong programme coordinator for IRN said: “In the midst of South East Asia’s economic crisis it is foolish for the Bank to push ahead with this highly risky project. It is very likely that it will not produce its expected benefits. The main risks are that the government of Laos will be further indebted and the livelihoods of thousands of local people destroyed.”

Backing up her point of view Imhof said that the main objective of the dam, according to World Bank officials, including Iwella, is that it will bring revenue to the impoverished Lao republic, whose only real resources are hydropower and timber, to help alleviate the poverty of five million Laotians.

IRN said this objective has been undermined because of the decline in the dam’s projected earnings. For instance, according to Imhof, at the time the World Bank first recommended that the dam be built back in 1991 it was estimated it would bring in annual revenue to Laos of $176m.

But according to the most recent Bank commissioned economic impact study, the benefits to Laos could now be as low as $33m a year – and even this figure is considered optimistic by some experts.

Meanwhile, adding to the uncertainty according to IRN, the Thai utility EGAT has not yet agreed to buy the power from the Nam Theun 2 dam.  Indeed Nam Theun 2 is not included in EGAT’s latest power development plan, claims IRN.

A further undertainty, admitted by the World Bank’s Lao Country Director, is that the consortium of private companies that plan to build and operate the dam – led by Transfield, the Australian construction company, and Electricite de France, and including two Thai- based companies, Italo-Thai Development and Jasmine International – want the Bank to provide a sovereign risk guarantee in the order of $100m for their investments, against the risk of possible adverse actions by Laos.

The companies are reportedly threatening that without this guarantee they will pull out of the project – and that is with apart from their finding the power purchasing agreement with Thailand and other commercial aspects of the project satisfactory.

In addition to the IBRD guarantee, the World Bank group is planning to provide an International Development Association or IDA affiliate credit of around $25m, part of which could be disbursed right away to help establish health and income-generation schemes among the resettled people, and to move the environmental aspects of the project along. On top of that the Bank’s private sector International Finance Corp (IFC) is planning to make an equity investment in the project as well as providing a loan.

World Bank officials emphasise the aim of the resettlement plan is to raise the living standards of the displaced people by, for example, providing them with different and improved crop and animal farming opportunities.  They also say there will be a specific indigenous peoples plan as they are among the resettled community.

But notwithstanding these social provisions, and a proposed watershed management plan which will include the establishment of the Biodiversity conservation area, Probe International, a Toronto-based NGO with 20,000 members says the World Bank is being disingenuous about governance/ management issues associated with the project and in particular about the important role the BPKP, a military logging company, will play.

BPKP the Bolisat Pattna Khet Phondoi, has had a logging concession in the reservoir area of the proposed Nam Theun 2 dam for a long time and has been resettling people, including indigenous people since 1995.

According to Probe, once BPKP has exhausted its supply of timber from the dam’s reservoir area it will want to continue logging in the remainder of the dam’s watershed area including in the area allocated for conservation.

Furthermore, according to a Laos branch of World Conservation Union, BPKP’s past practices, including banning the cultivation of traditional crops in areas where it has been logging, have already on occasion led to food shortages among local inhabitants and, earlier this year, to clashes with farmers.

Probe says the Bank has failed to recognise the importance of BPKP to the dam project and the fact that BPKP is both a member of the Laos government’s committee that decides on resettlement-related infrastructure projects and budgets, and, at the same time, that it its planning to bid for such contracts – ie. land clearing, road building and housing – itself.

In response to these criticisms, Iwella admitted there were governance issues in the project “that we have to watch and be aware of.” Regarding BPKP she said: “From past experience in regional rural activities, we have had a constructive engagement with BPKP. But we also know there are issues associated with BPKP in the past and we have to make sure they will not be repeated in the future.”

“BPKP will have to compete with other private companies in public bids associated with the project,” Iwella said.

That still leaves unanswered the question of BPKP participating in a bid related to the dam project, while being a member of the committee that decides on those bids.

“We are very aware that this project must benefit the country economically and should not add to its indebtedness or hardships,” said Iwella.

Aviva Imhof at IRN says Nam Theun “has sucked in a huge amount of human and financial resources, depleting the Lao government’s already weak capacity to deal with its development needs. The Bank should surely understand by now that promoting megaprojects in poor and indebted countries is a recipe for economic and environmental disaster.”

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