Mekong Utility Watch

The Theun-Hinboun public-private partnership- part 1 of 3

Grainne Ryder

October 1, 1999

A 3-part critique of the Asian Development Bank’s model hydropower Venture in Lao PDR.

PART 1
Forward to Part 2 / Forward to Part 3

1.Why Proponents Consider Theun-Hinboun a Success

1.1 Cajoling private investors

1.2 Socialized risk

1.3 Project financing

1.4 Project contracts

2.Why Theun-Hinboun Is an Economic and Environmental Failure

2.1 Environmental costs downplayed

2.2 The mitigation game

2.3 Environmental negligence

2.4 No enforceable standards

2.5 Failure to respect property rights


1. Why Proponents Consider Theun-Hinboun a Success

Long before the Theun-Hinboun dam in Lao PDR

had generated a single kilowatt of electricity, its international

promoters had declared it a model for future hydro development in the

six-country Mekong region. Three years before the hydrodam was

completed in 1998, the Asian Development Bank’s program director,

Noritada Morita, said it was “a prototype for public-private

partnerships.”(1) In 1997, international finance journals described Theun-Hinboun as the project finance deal of the year.(2)

A product of the Nordic dam-building industry,

the $260-million hydropower export scheme (all figures in U.S. dollars)

is the first hydrodam Nordic utilities have built outside their own

region. Nordic hydropower proponents boast that Theun-Hinboun is an

environment-friendly hydropower scheme because it required no

large-scale flooding or resettlement. Known as a “trans-basin diversion

project,” Theun-Hinboun includes a 25-metre high dam across the Theun

river, a 24-kilometer reservoir, a 210-megawatt power station, and a

four-kilometre canal that releases water into the Hai, a tributary of

the Hinboun river, which flows into the Mekong.

Nordic Hydropower, the company that owns 20

percent of Theun-Hinboun, was formed to implement the project in 1993

by Statkraft, the Norwegian state utility, and Vattenfall, its Swedish

counterpart.(3)

The utilities put up $22 million for Nordic Hydropower’s stake in the

project. The Norwegian agency for development cooperation provided $8

million for the dam’s feasibility study, design, and environmental

mitigation plans. Nordic Hydropower supervised the dam’s construction

and won the contract for operation and maintenance. Norwegian and

Swedish companies supplied the electrical and mechanical equipment with

financing from Nordic export credit agencies and the multilateral

Nordic Investment Bank.(4)

In addition to Nordic Hydropower’s share, Theun-Hinboun is 60

percent owned by the state utility, Electricit‚Äö du Laos, and 20 percent

owned by GMS Power (formerly MDX of Thailand). If the dam works as

planned, the owners expect to earn about $54 million annually from

electricity sales to Thailand and repay their commercial lenders within

the first five years of operation.(5)

Completed on time and under budget in April 1998, Theun-Hinboun is a

project of many “firsts,” said Lars Uno Thulin, chief of Nordic

Hydropower, at the dam’s opening ceremony, “in terms of foreign

investment, legal framework, financing, cross-border electricity sale

of energy, and logistics.”(6)

CONTENTS

1.1 Cajoling private investors

The biggest success for Theun-Hinboun proponents has been their ability to cajole private investors into an otherwise “unbankable” venture in Lao PDR. When Nordic hydropower proponents proposed the project in 1992, commercial lenders dismissed

Lao PDR as too politically and economically risky for investors. Neither the government nor its state utility were creditworthy. The legal framework was inadequate – there were no clear rules for enforcing commercial contracts and resolving disputes. And there was

the risk of expropriation or nationalization, arbitrary regulatory changes, currency non-convertibility, and economic collapse.

Apart from the country-specific risks, the private sector tends to regard hydrodams as high-risk, low-return investments, with a reputation for major cost overruns and delays due to environmental problems and public opposition.(7)

Large hydropower projects are “not an intrinsically attractive proposition to financiers,” according to Vientiane-based hydropower consultants, Lahmeyer International (Germany) and Worley International (New Zealand).(8)

In all, there are 11 categories of project risk that hydropower developers in the Mekong region must face before commercial lenders can be approached, reports Norconsult International, the Norwegian consulting firm that conducted the Theun-Hinboun feasibility study. The key to attracting commercial lenders, Norconsult International writes,

“is to minimize risk and uncertainties . . . which will make-or-break the financial viability of the proposed project.”(9)

CONTENTS

1.2 Socialized risk

Commercial lenders would never have backed Theun-Hinboun had it not been for the Asian Development Bank’s (ADB’s) zeal for public-private partnerships. The ADB has been trying to drum up private sector interest in Mekong hydropower development since 1993,

knowing that commercial lenders would refuse to risk their capital unless certain costs and risks could be “socialized” or shifted onto the public sector. For Theun-Hinboun, the ADB, and other public institutions – the Lao government, Nordic export credit agencies, and

the Electricity Generating Authority of Thailand (EGAT) – gladly assisted. Each institution had its own motive for accepting some risk. The Lao government needed foreign exchange to service its debts to international financiers.(10)

Nordic export credit agencies are in the business of backing Nordic companies overseas. EGAT wanted to expand its electricity supply without the environmental hassle associated with its hydropower schemes and the growing cost of compensation demanded by  dam-affected citizens at home.(11)

As a result, taxpayers responsible for these institutions have been forced to shoulder risks that the private sector prudently refuses to take. If there is no market or customers for Theun-Hinboun power, for example, Thai taxpayers and ratepayers are still obliged to pay for it. Lao citizens owe the ADB $60 million and are burdened with the long-term social and environmental costs of the dam. Taxpayers in Nordic countries are responsible for about $70 million in government-guaranteed loans from Nordic financing institutions to the

Theun-Hinboun Power Company. Ultimately, taxpayers in donor countries are responsible for about half the power company’s debts.

CONTENTS

1.3 Project financing

The method ADB used to attract private capital to the Theun-Hinboun venture is known as project finance or limited recourse financing, a technique that project finance specialists, such as Karl Jechoutek and Ranjit Lamech at the World Bank, describe as “a solution to the intractable problem of getting private credit to a sector dominated by noncreditworthy borrowers and public agencies.”(12)

Also known as build-operate-transfer (BOT) financing, this method allows the host government to obtain an infrastructure project without having to pay the entire cost. The government grants a concession to a company, in this case the Theun-Hinboun Power Company, to develop and operate what would traditionally have been a publicly funded project. The company is responsible for attracting financing, building and operating the project, and covering any construction cost overruns. The rights and responsibilities of the various parties involved are then set out in a series of contracts and agreements.(13)

The project sponsors РNordic Hydropower, MDX, and the state utility, Electricité du Laos Рare not required to use their own assets or income as collateral for raising funds. Instead, the project sponsors set up a single-purpose company, the Theun-Hinboun Power

Company (THPC), to own and operate the project separate from any of its owners. The legal borrower for the project then became the company itself, and the lender’s recourse (or claim) for service of the debt is against only the assets and income of the company, not against the owners. So in the event that the company goes bankrupt, the lenders have no recourse to the assets or income of any of the project sponsors. Next, to protect investors from political interference or mismanagement of the company’s revenues, the project sponsors set up an offshore, “escrow” account into which all revenue payments are made.

The account is managed by the Indosuez Bank on behalf of the commercial lenders. The buyer of Theun-Hinboun power, EGAT, deposits its payments directly in this account, half in U.S. dollars and half in Thai baht, (thus avoiding Lao currency, which is not convertible on the global currency market). Every six months, the Indosuez Bank distributes the funds from this account, first to THPC for operation and maintenance, followed by interest and principal repayment to lenders, then royalties and tax to the Lao government, and finally, dividends to the company shareholders.

CONTENTS

1.4 Project contracts

Before commercial lenders and export credit agencies could be approached for financing, the ADB and financial advisor, Citibank, arranged the primary contracts for allocating

specific risks to different parties involved – the project sponsors, the power purchaser, the host government, and the newly formed power company.(14)

Once the Lao government approved the project contracts, the ADB approved a $60-million loan to the government in October 1994 for the dam’s civil works. Together with Citibank, the ADB then shopped for export credits in countries that were likely to supply equipment (i.e., Norway and Sweden for turbines and mechanical equipment, Italy for steel works). The key contracts and agreements are as follows:

1.4.1 The project completion guarantee

Commercial lenders required a completion guarantee from the

Theun-Hinboun project sponsors because of the risks associated with “implementing a project in the jungles of Lao PDR,”  according to Statkraft manager, Kjell Heggelund.(15)

If the project sponsors had failed to complete the dam or the company went bankrupt before one month of successful operation had passed, commercial lenders would have had recourse to the project sponsors for the company’s commercial debts.

1.4.2 The shareholders’ agreement

This agreement provides security to investors by defining the commercial relationships between THPC shareholders, their obligations to one another, and their responsibilities under international law. In the event that disputes “cannot be resolved amicably,” this agreement stipulates that disputes shall be submitted to arbitration in Singapore under the United Nations

Commission on International Trade law.(16)

1.4.3 The power sales agreement

This agreement allocates “market risk” to the buyer of Theun-Hinboun power, EGAT. EGAT agrees to buy power from the Theun-Hinboun Power Company for a 25-year period at a fixed price and quantity. If EGAT doesn’t need the power or has no market or customers, the utility is still obliged to pay for it. On the strength of this agreement, which was signed in June 1996, a consortium of Thai commercial banks agreed to co-finance the dam.(17)

1.4.4 The licence agreement

This agreement grants THPC permission to use Theun-Hinboun water and land resources and to establish the premises and structures for the project. It outlines the terms for transferring the project to the government after a 30-year period. It also restricts the power company’s liability for environmental mitigation and compensation to an arbitrary sum of $1 million.(18)

1.4.5 The ADB loan agreement

Signed by the ADB and the Lao government, this agreement stipulates that the Lao government will uphold all obligations in the licence agreement and “shall cause THPC to carry out the Project with due diligence and efficiency and in conformity with sound administrative, financial, engineering, environmental and public utility practices.”(19)

1.4.6 The ADB project agreement

Signed by the ADB and THPC, this agreement aims to reassure private investors that THPC remains technically and financially viable throughout its concession period. The agreement transfers responsibility for environmental matters away from Nordic Hydropower and MDX, stating that the Lao government “must implement, or cause to be implemented, an environmental management program satisfactory to the Bank” for  environmental protection, site rehabilitation, management of protected areas, fishery management, compensation of local residents, community safety, health and education, worker health and safety, and environmental monitoring.”(20)

THPC is obliged to submit for approval by the ADB all its plans,

designs standards, specifications, work schedules, construction

methods, and terms and conditions for the dam’s operation. The

agreement also requires the company to submit performance reports and financial accounts to the ADB and “promptly inform the Bank of any condition which interferes with, or threatens to interfere with, the progress of the Project, [and] the  performance of its obligations.”(21)

CONTENTS

2. Why Theun-Hinboun Is an Economic and Environmental Failure

Proponents have described Theun-Hinboun as a “win-win situation” providing electricity to a buyer and profits to the producers without any large-scale flooding of land or resettlement. But whether the project is a worthwhile investment for Lao PDR is doubtful.

The original economic justification for the project was based on a selling price ranging from 5.80 to 8.69 cents per kilowatt-hour, but the price EGAT agreed to was only 4.30 cents per kilowatt-hour. In the dam’s first year of operation, the Lao government earned about $16 million, or two-thirds the expected revenue due to Thailand’s baht devaluation, but the ADB claims this will not have “any impact on [the company’s] profitability.”(22)

No one knows the real cost of Theun-Hinboun in terms of lost resources and livelihoods. Rather than take responsibility for the dam’s long-term environmental and social costs, proponents have worked to externalize them in order to inflate the dam’s profitability.

CONTENTS

2.1 Environmental costs downplayed

The ADB approved the project based on the proponents’ environmental assessment that concluded the dam would have “significant beneficial environmental impacts.”(23)

Four years later, the ADB was forced by public pressure to admit that the project has caused extensive damage to fisheries and water supplies, affecting an estimated 53 villages and thousands of people in the Theun-Hinboun valley. In April 1998, a former aid worker in Lao PDR, Bruce Shoemaker, released a report that documented villagers’ claims that the dam had caused fish catches to decline as much as 90 percent, disrupted water supplies, and destroyed agricultural land. Shoemaker also reported that Theun-Hinboun proponents had misled villagers about the project’s impacts, and he concluded that THPC should directly compensate affected families. The ADB responded with a warning that efforts to force THPC to pay additional costs would damage the confidence of foreign lenders and investors in Lao PDR.(24)

Six months later, the ADB admitted that the damage to fisheries was far more serious than proponents had predicted but insisted that it was up to the Lao government, not THPC, to pay for long-term environmental mitigation costs.(25)

Nordic proponents knew from experience that the Theun-Hinboun would profoundly affect the Theun-Hinboun river systems and the people who depend upon them for their food and income. Nordic institutions and the ADB approved financing for the dam despite

warnings from several government agencies and environmental advisors in Norway that the proponents’ environmental assessment was inadequate and misleading. The Norwegian water resources and energy directorate, the country’s hydropower regulatory body, warned of “far-reaching environmental and social disturbances” if environmental matters were not taken seriously. The environment ministry found nine of the proponents’ claimed positive effects to be “highly questionable.”

Vattenfall’s senior ecologist, Per Sjostrom, noted that the proponents had failed to develop a plan for fisheries management in the dam’s reservoir, rural electrification, irrigation, and mitigation of downstream impacts. The Norwegian state pollution control authority found the assessment “far from satisfactory” and concluded that it “cannot recommend implementing this project on the basis of the existing data.”(26)

CONTENTS

2.2 The mitigation game

In 1996, THPC was forced by public pressure to increase its environmental budget following the completion of additional environmental studies that concluded that about 6,000 people in 25 villages were “especially vulnerable” to project impacts and that

the proposed environmental budget was inadequate.(27)

Citizens groups outside Lao PDR have denounced this budget as inadequate because it does not include cash compensation for affected families nor does it include any guarantee that proposed environmental mitigation plans would benefit affected individuals and  communities.(28)

Two-thirds of THPC’s new budget went to the construction of a “re-regulating pond” to regulate releases from the powerhouse, and $380,000 went to design modifications and site cleanup – all standard features that should have been included in the initial project cost; $300,000 went to an environmental impact monitoring program; $250,000 went to consultants for rural development, fish, and irrigation studies; and a paltry sum of $50,000 was allocated for compensation, most of which paid for farmland for siting the transmission towers. The new agreement also absolved THPC from any further obligation to provide compensation.(29)

In 1997, THPC consultants completed a 5-year plan for the project area, which recommended spending an additional $4 million on road building, irrigation, fisheries management, and training for government health and agriculture officials. The ADB insists that it is the Lao government’s responsibility to fund these programs but the Lao

government has yet to make a clear commitment. In any case, the Nordic part-owners of Theun-Hinboun know from experience that efforts to restore fisheries in the Theun and Hinboun rivers may not succeed.(30)

CONTENTS

2.3 Environmental negligence

The ADB’s report last November lists a number of deficiencies in THPC’s handling of environmental matters, which suggests negligence or incompetence on the part of the dam owners.

THPC had underestimated the extent of damages and then failed to systematically assess damages and compensate affected people. THPC had failed to collect even the most basic data needed for developing a mitigation and compensation scheme. The Theun-Hinboun environmental management committee, which was supposed to be monitoring the project’s

impacts, was found to be understaffed, underfunded (despite an earlier grant of $300,000), and operating without any clear lines of authority. There was no funding for the rural development plan. And the fisheries management plan was still incomplete ‚Äì even though documents prepared for the ADB loan in 1994 stated that a $195,000 fisheries management program was “scheduled to commence as soon as the project is approved.”(32)

Despite these problems, the ADB concluded that THPC had the situation in hand. THPC had agreed to “immediately undertake additional work,” including a survey of the project area, and additional funding for the environmental management committee. In response to villagers’ complaints, the company had started to build a series of channel crossings and to install new wells wherever water supplies had been disrupted and had agreed to compensate people who had lost fishing gear as a result of the dam’s operation. The company also promised an environmental management plan to “avoid the ad hoc and more expensive approach to mitigation/monitoring now occurring, and ensure that Project impacts are addressed in a timely, adequate and equitable fashion.”(33)

CONTENTS

2.4 No enforceable standards

Whatever the promises made by Theun-Hinboun proponents, the problem is that it is still left to the proponents’ discretion to decide what constitutes “timely, adequate, and equitable” mitigation, leaving definitions infinitely malleable and ineffectual. The 1994 ADB loan documents, for example, state only that each party should “carry out the Project with due diligence and efficiency, and in conformity with sound administrative, financial, engineering, environmental and public utility practices.”(34)

Unaccountable to local residents, none of the proponents have any standards to which they are committed, and by which Lao citizens could judge THPC’s performance and hold it accountable for damages. Such failure to insist upon enforceable standards suggests that none of the proponents believe fair compensation can, or should, be built into hydropower schemes in Lao PDR, or even that affected citizens have the right to claim compensation.

CONTENTS

2.5 Failure to respect property rights

Dam-affected citizens are powerless to influence decisions about compensation and environmental mitigation because there are no national laws to enforce property rights (as well as no equitable access to regulatory bodies and the courts). In principle, the Lao government claims jurisdiction over all resources although, in practice, it recognizes the important role individuals and communities play in managing and regulating resource use. As a result, state laws and decrees pertaining to resource use tend to be ambiguous

and contradictory in their references to private property. Under the water and water resources law, citizens have no right to refuse water resource development (i.e., hydrodams, reservoirs, diversion canals, and transmission lines), but the state “must make

appropriate compensation for damages which arise.”(35)

At the same time, “individuals, juristic entities, or organizations” are prohibited from damaging “water, water resources, public property and other individual’s property.” Under the electricity law, electricity investors (or concessionaires) are obliged to pay damages

“where there has been damage to the environment, lives and property of people,” but only if the affected people had to be resettled as part of the project. Electricity distributors, on the other hand, are obliged to pay damages in the event that “the electricity destroys the

environment, people’s lives or their property or public property.”(36)

Forward to Part 2

Forward to Part 3

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