Probe International Mekong Press Backgrounder #9

April 6, 1998

New Hydro Dam Threatens to Drown Lao Government in Debt, Experts Warn

The Theun-Hinboun hydro dam in Lao PDR is scheduled to start generating electricity this week, launching what proponents believe will be a new era in public-private partnerships. Meanwhile, experts warn that megaprojects like Theun-Hinboun threaten to drown the cash-strapped Lao government in debt.

The Asian Development Bank and Citibank, the project’s chief financial advisors, are promoting the Theun-Hinboun partnership, which includes the Lao PDR government, a consortium of Thai and Scandinavian companies, and about 20 financial institutions, as “an enormous leap forward for Lao PDR” and “a model for future transactions” in the region.

But their enthusiasm is not shared by other analysts.

In 1996, a Canadian energy consultant warned that the Theun-Hinboun proponents had overestimated the profitability of Theun-Hinboun and that the project is “very likely to fail as an investment.”

The study, conducted by Thomas Adams of Borealis Energy Research Association, found that the proponents had overestimated output from the dam and overestimated the likelihood that revenues from electricity exports to Thailand would provide a reasonable rate of return to investors and be sufficient to service the project’s debts.

The Theun-Hinboun Power Company is under contract to supply electricity to Thailand for 4.3 US cents per kilowatt-hour, which is substantially lower than the 6 to 8 US cents range recommended by Scandinavian hydro power consultants for commercial viability.

But no matter how the project performs, Citibank and the Asian Development Bank have structured the Theun-Hinboun deal so that commercial lenders are protected while the bulk of the risks fall to the Lao government.

Ultimately, the Lao government, not the Theun-Hinboun Power Company, is responsible for repaying US$60 million borrowed from the Asian Development Bank and another US$70 million from export credit agencies in Europe. An undisclosed portion of the money borrowed from commercial banks by the Theun-Hinboun Power Company has been guaranteed by export credit agencies in Europe. So if the project fails, taxpayers in Europe will pay some of the project’s debts, along with the government of Lao PDR.

Kent Rowey, a project finance specialist with the UK-based Freshfields, writes in the Financial Times that it is precisely this kind of government support for high-risk megaprojects that could turn into “a serious sovereign debt problem” for Asian countries such as Lao PDR.

In the Asian Wall Street Journal, the World Bank’s chief economist, Joseph Stiglitz, blames government guarantees for contributing to Asia’s financial crisis. Guarantees have encouraged poor investment decisions by commercial lenders and borrowers, he argues, which has contributed to the region’s buildup of foreign debt that triggered the collapse of local currencies.

The Theun-Hinboun Power Company’s financial troubles began with last year’s currency meltdown. Under its power sales agreement with Thailand’s Electricity Generating Authority (EGAT), half the project’s export sales are to be paid in Thai baht, the other half in U.S. dollars, which means that Thailand’s massive baht devaluation has hurt the Theun-Hinboun Power Company’s revenues even before it has sold a single kilowatt of electricity.

In fact, EGAT may have difficulty paying for Theun-Hinboun’s power anyway. EGAT is having trouble servicing its foreign debt, and the falling demand for electricity increases the likelihood that the utility will walk away from its 25-year contract unless the Theun-Hinboun Power Company lowers its export price.

“Currency risks, declining export revenues and extremely unrealistic expectations about the dam’s output make the investment in Theun-Hinboun look more and more like a financial bust for Lao PDR, not a boon,” says Borealis consultant Thomas Adams.

Notes

1. The ribbon-cutting ceremony for the 210-megawatt Theun-Hinboun dam took place Saturday, April 4th, 1998, in central Lao PDR.

2. The Theun-Hinboun Power Company is 60 percent owned by the Lao government, 20 percent owned by MDX Lao Company, and 20 percent owned by Nordic Hydro power. Nordic Hydro power is jointly owned by Statkraft and Vattenfall, large state-owned utilities in Norway and Sweden, respectively.

3. Canadians contribute roughly US$100 million annually to the Asian Development Bank, the lead financier for the Theun-Hinboun project.

4. The capital cost of the Theun-Hinboun project is US$260 million, which is equivalent to 17 percent of Lao PDR’s GDP in 1995 (US$1.5 billion). The Lao government experienced a deficit equivalent to 11 percent of the GDP in 1995. The country’s per capita income is about US$320. (Source: World Bank, 1996)

5. According to the Bangkok-based newspaper, The Nation, the local currency in Lao PDR has lost 65 percent of its value since last year’s currency crisis began.

6. See “Breaking Ground in Laos,” by Christopher Thieme of Citibank in Independent Energy (July/August 1997), and “Hydropower project to increase Lao PDR’s GDP by 7 percent,” by Ian Gill of the Asian Development Bank in ADB Review (November/December 1997).

7. The Borealis report is available at Economic Critique of Nam Theun-Hinboun Hydropower Project and Electricity Development in Laos

For further information please contact: Grainne Ryder, phone 416 964 9223 ext.228, fax 416 964 8239.