Mekong Utility Watch

‘Battery of Asia’ may run flat

Financial Times
April 6, 1998

Thailand’s economic crisis is raising questions over the energy exporting hopes of neighbouring Laos  As two giant turbines begin to roar in the middle of the jungle, Laos is starting to become the “battery of Asia.” Last week the $280m Theun-Hinboun dam began producing electricity for neighbouring Thailand, the first of what Laos hopes to be as many as 21 dams spanning this poor landlocked country.

Although Theun-Hinboun, at 210MW, is small as hydro-power projects go, it is huge for poor land-locked Laos. It will nearly double export earnings and increase gross domestic product by 7 per cent. It also marks the first time the country has got private bank financing on a large scale, albeit with cover from a host of multilateral institutions led by the Asian Development Bank (ADB).

Access to financing is crucial if Laos is to complete the other big infrastructure projects necessary to fulfil its non-binding 1996 agreement with Thailand to provide 3,000MW of power by 2006. Both the World Bank and ADB are actively looking at other hydro-power projects in the country.

But if Theun-Hinboun, a joint venture between the government of Laos, GMS Power of Thailand and Nordic Hydropower, has shown that cash-generating dams can indeed be built and financed in Laos, doubts are being cast on Thailand’s ability to fulfil its side of the agreement.

As Thailand’s economic downturn continues, the country’s need for new sources of electricity is diminishing. Power demand, once expected to grow at 7 per cent annually for the next 10 years, is slowing dramatically. The Electricity Generating Authority of Thailand (Egat) has already committed itself to buying electricity from seven new Independent Power Producers (IPP) inside the country.

“Five years ago we had high demand and saw that Laos could provide us with electricity at a reasonable price,” says Viravat Chlayon, governor of Egat. “But now we have to consider very carefully when we can take power from the next [Lao] projects. If growth is not high enough we could end up with unnecessary power reserves.”

Mr Viravat adds that the 3,000MW agreement with Laos, like a similar 1,500MW agreement to buy hydro-power from Burma, “will not be cancelled but made into a long-term idea.”

Even if Thailand does decide to buy more Lao hydro-power, regional currency volatility makes projects harder to finance. In the case of Theun-Hinboun, developers were “hit hard” by Thailand’s devaluation, says David Michaels, managing director of GMS Power.

The price Egat pays the Theun-Hinboun consortium is paid out half in dollars and half in baht. With a minimum 30 per cent devaluation in Thailand, revenues in dollar terms are about 15 per cent lower.

Theun-Hinboun had attempted to create a natural hedge by splitting the financing equally between baht loans, led by Bangkok Bank, and dollar loans led by Crédit Agricole Indosuez. But since all costs in Laos are dollarised and because the baht loans carry high interest rates, developers used their dollar financing first. When the devaluation came, there was a financing gap and baht interest rates climbed even higher.

“When we financed this project Laos was a problem but Thailand was a gem. We really sold it as a Thai project,” says Mr Michaels. “Now even IPPs in Thailand need concessionary financing. For projects here in Laos it’s even tougher.”

Theun-Hinboun is still profitable. Not so Houay Ho, a 150MW dam in southern Laos built by Daewoo of Korea, scheduled to begin operation in October. Plagued by cost overruns, it is understood to be for sale and Daewoo is asking Egat to renegotiate its purchase agreement.

Theun-Hinboun and other future Lao hydro-power projects would benefit from any adjustment in how Egat pays for Lao hydro-power. Still, construction has been halted at two other sites, Xepian-Xenamnoy and Nam Ngum 2, while the concession and power purchase agreements at the giant Nam Theun 2 have lapsed.

Many in the energy industry believe that by 2006 Laos will, at most, be supplying Thailand with only about 700MW of hydro-power. “That’s about all Egat can take,” says one developer.

Going slow may be a good thing. Theun-Hinboun is relatively benign in its environmental and social costs, with no large reservoir and no human resettlement needed. But according to a report released this week by the International Rivers Network, villagers in the area are complaining about declining fish stocks.

Theun-Hinboun developers are funding fishery and rural development studies for the area, but it will be up to the Lao government to implement them, a big question mark given the government’s limited capacity and resources.

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