Grainne Ryder
Creating Poverty: The ADB in Asia, Focus on the Global South
May 3, 2000

With few exceptions, the first wave of private power deals in the early 1990s were for oversized, outmoded, and polluting power plants that the MDBs have traditionally financed. Elsewhere in the world, wherever competition and private power producers have been introduced, big hydro dams, along with nuclear power stations, and big coal plants, are being replaced by a new breed of power plant: clean and efficient combined cycle gas turbine plants and small-scale renewable energy systems. Technological advances have made it possible to profitably generate electricity on a smaller scale at lower costs, making the old-style megaprojects and long-distance transmission lines obsolete and uncompetitive.

Private investors prefer combined cycle plants because an average sized plant (50 to 200 MW) can be installed in under a year for one-third to half the capital cost of a conventional power plant. They can be installed close to consumers so they don’t require additional investments in transmission lines. They burn low-cost natural gas which produces no smog or acid rain. And they can be easily switched on and off, generating electricity and heat, depending on the customers’ needs.

Some utilities in Asia have granted licenses to industrial and municipal power consumers with large electricity and heat requirements, allowing them to take advantage of this generating technology. By installing and operating their own combined cycle plants (in sizes ranging from 5 to 50 MW, and 100 to 200 MW range), sugar mills, pharmaceutical companies, oil companies, and fertilizer factories have been able to lower their production costs while reducing demand on the state-owned grid.

In Thailand, for example, a semi-conductor manufacturer, Alphatech Electronics, set up its own power generating company and installed a 210-MW combined cycle plant that supplies electricity and steam on-site and to housing and commercial facilities in the vicinity, and sells its surplus to EGAT. By generating its own electricity, Alphatech expects to save approximately US$40 million a year on its electricity bill. The plant also includes a gas-fired cooling system to produce chilled bottle water as a byproduct. (Alpha Power is 20 percent owned by the U.S.-based power company Sight, and it bought the plant technology from France, Japan, and Switzerland.)

The main constraint on these high-efficiency, cost-effective, cleaner power plants are the monopoly utilities themselves. The utilities decide who can become “self-generators” while licensing other small power producers as supplemental suppliers to the grid. Small power producers are not allowed to bypass the utility and enter into contracts with consumers directly. In fact, more small-scale power producers could be displacing costly and inefficient power plants (utility-owned and private) if only they were allowed direct access to consumers.

The ADB knows that private investors prefer combined cycle plants to large hydro schemes. In its 1995 study of hydropower potential in the six-country Mekong region, the ADB described the first private power deal in the Philippines – a 210-MW combined cycle plant built and financed by the Hong Kong-based Hopewell (now CEPA) for $41 million within a twelve month period. Compare that to the ADB’s newest hydro dam in Lao PDR, the 210-MW Theun Hinboun project, which was financed by the ADB, Nordic state utilities, and Nordic export credit agencies, cost $260 million, and took six years to build. As for the payback period, the dam’s developers are hoping they will break even after 10 years of operation (weather permitting). Unlike Hopewell’s plant, the Theun Hinboun dam in Lao PDR took almost a decade of planning that cost the Norwegian government more than $12 million worth of aid grants.

The Alternative Electricity Model: Competition in a Decentralized Market If all consumers are to have access to cheaper and better generating technologies, a new institutional structure is required. Now that new generating technologies (i.e., combined cycle plants, micro-turbines, fuel cells, and small-scale solar systems) have made decentralized power production commercially viable, there is no longer any reason to have a monopoly entity controlling the electricity system. Only the transmission and distribution networks, which are natural monopolies, need a central coordinator to maintain grid stability and allow power producers access to the grid. Transmission lines can be operated much like a public highway, that is, open to anyone, provided users pay an access fee, and conform to basic rules of the road. In this way, a diversity of power producers can use the grid to sell power directly to customers or setup small power plants to supply customers independent of the state grid.

As the number of self-generating consumers and private power companies offering credible alternatives increases, the market uncertainty for the utilities’ traditional large-scale power plants increases. As such, there is no valid public policy reason to risk public funds in the electricity sector any longer or to support monopolies in electricity generation. This does not mean that governments must give up control of the electricity sector, but rather that the public interest can be more effectively safeguarded through regulation than through public ownership. (If governments want to provide assistance to low-income or rural consumers for electricity services then they should do so by giving them a direct subsidy rather than subsidizing electricity rates and power producers. Deciding whether and how to protect the poor and provide subsidies to them should be the responsibility of governments not power producers.)

Peddling an Obsolete Electricity Model

The institutional alternative for cheaper, cleaner power is competition in a decentralized market. The ADB knows this. In Vietnam earlier this year, Mike Bristol, an ADB project engineer, told the World Commission on Dams (partly financed by the ADB) that the introduction of combined cycle plants in Thailand, and the growing availability of low-cost natural gas in the Mekong region, is driving electricity prices down, leaving hydro schemes less competitive, and a regional transmission grid unnecessary. In other words, the ADB’s vision of giant hydro schemes connected by a six-country transmission grid to serve Thailand’s electricity market – a vision the Bank has promoted for the last decade – no longer makes economic sense now that decentralized power production is commercially viable.

Bristol also reported that investments in large-scale power plants and long distance transmission lines are increasingly at risk of becoming stranded – that is, the investment cost is unrecoverable from ratepayers as cheaper and better generating options become more available in the region. Yet the ADB will continue to finance large hydro schemes in the region, he said, as long as governments want to build them.

Shortly after the World Commission on Dams meeting in Hanoi, the ADB announced an $80 million loan to the Vietnamese government for its first public-private partnership in dam building. The 260-MW Se San 3 dam on the Se San river – a Mekong tributary flowing from Vietnam’s central highlands down through Cambodia – is expected to cost $300 million. If completed, Se San 3 will be the second dam on this river blocking the seasonal migration of dozens of fish species that move back and forth between the Mekong mainstream, Cambodia’s Great Lake, and other tributaries. Prior to the Se San 3 loan, the ADB provided a $1.2 million grant to the Vietnamese government for packaging Se San 3 as a “model project” and another $150,000 grant for developing procedures for forced resettlement (“Strengthening of Resettlement Management Capacity in the Ministry of Agriculture and Rural Development”).

In a recent policy announcement, the ADB claimed that such private-public partnerships “balance development goals with commercial interests.” But the truth is that public-private partnerships are designed to protect private investors from the real costs and risks associated with their schemes. They do not serve electricity consumers or citizens well because they are based on monopoly deals between state utilities and private investors that put their own interests before those of consumers and citizens. The ADB is simply cajoling private capital into uneconomic hydro ventures with uncreditworthy governments, allowing investors to secure the profitability of their schemes by forcing costs and risks onto taxpayers and ratepayers. The ADB is encouraging governments to risk public funds on hydro dams that make for unreliable and uncompetitive power providers.

Creating Moral Hazard

By promoting power deals between governments and the private sector, multilateral lenders, such as the ADB, have created a fatal condition economists call “moral hazard.” The ADB works with governments and state utilities to convince private investors to take risks they otherwise would not – by relieving them of the financial and environmental risks associated with their schemes. With captive markets, predetermined rates of returns, prices set by decree, and guaranteed revenues, private investors were able to take financial risks with little fear of a loss. This weakens the integrity of investment decisions and the scrutiny that contracting parties would otherwise apply to each other. The ADB encourages private investors and power producers to proceed with schemes that are uneconomic because they know that if the utility can’t pay for the power, governments would bailout the utilities, and the governments would, in turn, be bailed out with loans from the ADB and the World Bank (called “Public Sector Reform Loans” and “Power Sector Restructuring Loans.”) By protecting investors from the risks of doing business, instead of encouraging effective regulation, the MDBs have reinforced or bankrolled inefficient electricity systems.

Setting the Rules for Sustainable Electricity Investments

After a decade of public-private power debacles in Asia, energy analysts (at Canada’s Energy Probe Research Foundation, China’s Energy Research Institute, the World Energy Council, Britain’s Royal Institute of International Affairs, the Bangkok-based International Institute for Energy Conservation, and the Lawrence Berkeley National Laboratory at the University of California, to name a few) agree that the majority of consumers won’t have access to high-efficiency, low-cost generating technologies and renewable energy systems until monopolies are dismantled, competition is introduced, and electricity markets are designed to safeguard the rights of consumers and citizens through open and accountable regulation.

The institutional alternative for cheaper, cleaner power is competition in a decentralized market. To this end, Probe International recommends the following principles for restructuring the electricity sector:

• Internalize costs and risks

• Dismantle electricity monopolies

• Introduce customer choice

• Enforce property rights

• Establish regulation that is subject to legislative and judicial review

• Establish public oversight of the electricity reform process

• Internalize costs and risks. Power producers must be forced to take responsibility for their actions. They must internalize the health, social, environmental, financial, and political costs and risks associated with their schemes, and negotiate fair deals for the resources they wish to use. In this way, destructive investments would quickly be replaced with productive ones, and economies would thrive. The ADB and its client governments do not understand that externalizing costs is an economically inefficient strategy for development. They do not believe that citizens are entitled to fair compensation for their losses. If they did, fair compensation would be built into power projects, either making them uneconomic, and therefore not worth investment, or acceptable to those who must live with the project’s consequences.

• Dismantle electricity monopolies. This is necessary to allow all power producers fair and open access to the state transmission grid and to eliminate the government’s conflict of interest position as an investor and a regulator which has prevented effective regulation of power producers (state and private).

• Introduce customer choice. Giving consumers direct responsibility for electricity purchases – that is, giving consumers the right to generate their own power or buy from the supplier of their choice – will improve investment decisions by creating accountability between the producers and consumers. Similarly, the distribution companies or municipal utilities that supply electricity to small or household consumers, in urban and rural areas, should be allowed to choose their own supplier.

• Enforce property rights. Citizens need effective laws that recognize private ownership (individual and community) and uphold property rights (i.e., customary rights to land, water, fisheries, and forests). Citizens also need equitable access to a judicial system that will uphold their property rights. If property rights were enforced, the onus would be on hydropower developers to win the approval of all potential victims rather than on potential victims to defend themselves against environmental aggressors. Only when citizens have their rights to water, land, fisheries, forests, and clean air protected by enforceable laws will power project developers be obliged to make fair deals for the resources they use. Enforcing property rights would put the onus on project proponents to properly internalize costs and win the approval of potential victims, or risk court action and higher costs later on. Property rights holders should have the right to stop a project (i.e., by getting an injunction from a court) before or after the project has been approved. They should also have the right to sue power producers (public or private) for damages to their health, property, resources, and livelihoods.

• Establish regulation that is subject to legislative and judicial review. Citizens need a system of regulation that formalizes and makes public the rights and responsibilities of electricity investors, consumers, power producers, and the role of the regulator in enforcing those rights and responsibilities. Citizens need a regulatory body to license power producers, to specify power producers’ rights and obligations, enforce standards (i.e., for transmission and distribution service, service quality, operating codes, and environmental performance), and to protect consumers from monopoly pricing. The regulator should be empowered by law to enforce a licensing procedure to ensure, for example, that licence applicants invite all potentially affected individuals and communities to voice their opinions and concerns to the regulator and the proponents. Proponents should have to demonstrate to the regulator that, for example, they have met with potentially affected individuals and communities to determine whether or not they were likely to achieve informed local consent or if there were insurmountable obstacles to the project (i.e., opposition from local residents and resource users, refusal from property rights holders to sell their land, bear other project risks, or to negotiate compensation).

To ensure that all potential victims are able to obtain justice, the powers of the regulator and the licensing procedure itself must not override or extinguish citizens’ property rights (individual or communal). All rules pertaining to power producers should, at a minimum, recognize that citizens retain their right to recover full damages in the event of harm to their resources, property, and livelihoods. With strong property rights, the licensing procedure is likely to proceed smoothly because citizens will know their interests are protected and that they have several avenues for protecting those interests. Once notified, they may let the proponents and the regulator know they do not want to sell their land or negotiate compensation for other losses and risks. Or they can decide to participate in the licensing procedure and negotiate a compensation package to their satisfaction.

Not all citizens will be protected by the regulatory procedures. There may be people who feel that, even after mitigation and compensation, the power project imposes unacceptable risks on them. There may be people who are wrongly excluded from the decision-making process. There may also be people who voted for the project but experience unforeseen – and thus uncompensated – problems with it. Or, problems may arise, conditions might change, or unexpected events might occur. The practice of the power producer might deteriorate or the regulator might fail to enforce its own operating and environmental standards. As such, citizens must have the right to appeal to the courts for damages. Knowing that citizens are protected by law will give licence applicants the incentive they need to reach agreement with all affected citizens or face the risk of costly delays, injunctions, and court-assessed damages later on.

• Establish public oversight of the electricity reform process. Establishing new rules for power producers, particularly ones that threaten old vested interests, has proven to be a technically and politically demanding task elsewhere in the world. It requires good democratic procedures and public oversight. It requires a well-functioning legal system that can uphold contracts and respect the property rights of all citizens. And it requires honest and open government. Such conditions for reform simply don’t exist in many parts of Asia in part because governments have relied on aid institutions for financing and policy direction for so long that they are unaccustomed to accounting to citizens when they set new policy directions.

Certainly, the ADB has no credibility for advising governments in the region about shaping an open, accountable, and competitive electricity market. It is an institution above the law, it is not part of any local economies, cultures, or political systems, and it has a track record of setting policies and rules that protect private investors and power producers at the expense of consumers and taxpayers. An institution that knows no market discipline or public oversight is not well placed to preach to Asian governments or power producers about such practice.

It is time for the ADB and other aid institutions to exit the electricity sector so that consumers and citizens can drive the reform process.

-END-

Appendix A: ADB-Financed Power Projects That Have Created Poverty and Destroyed the Environment

Mahaweli Hydro and Irrigation Project, Sri Lanka

The ADB and a host of other aid institutions financed the five-dam multi-billion dollar Mahaweli hydro and irrigation scheme which displaced and impoverished 60,000 families since it began in 1970. In 1999, the ADB approved a $250,000 grant to the Sri Lankan government for developing “a policy applicable to involuntary resettlement in public and private sector development projects,” based on the rationale that past resettlement schemes have failed. In its description of the proposed grant, the ADB notes that the current rate of suicide among people resettled by the Mahaweli scheme is four times higher than the world average.

1998 – Meizhou Wan Coal-Fired Power Plant, Fujian province, China.

The ADB loaned $50 million to the state-owned Fujian Pacific Electric Company for a 720-MW coal-fired project now under construction on the Zhongmen Peninsula. Co-financed by French and Spanish export credit agencies, and four commercial banks, the project cost $828.5 million. The ADB reports that Meizhou is expected to alleviate chronic power shortages in Fujian province due to inadequate investment and an over-dependence on unreliable hydrodams that depend on seasonal rainfall.

Nam Ngum Hydro Dam, Lao PDR

The ADB loaned $24 million to Thailand’s state utility, EGAT, for the transmission line from the Nam Ngum dam in Lao PDR to Thailand. The bank also partly financed construction of the 150-MW Nam Ngum dam in the 1970s which flooded several hundred square kilometres of forest, wiped out riverine fish stocks, and opened up the watershed to logging. The bulk of the dam’s electricity is sold cheap to Thailand because drought and siltation in the dam’s reservoir have reduced the dam’s generating capacity by one-third, making it an unreliable source of power. Dozens of communities displaced by Nam Ngum are still impoverished, trying to eke out an existence on surrounding hillsides, without access to safe drinking water, schools, and other basic facilities. In the last five years, the ADB has financed construction of two smaller dams, Nam Song and Nam Leuk, designed to divert water to the depleted Nam Ngum reservoir.

1995 – Masinloc Coal-Fired Power Station, Philippines

The ADB loaned the National Power Corporation $254 million for transmission lines and a second 300-MW generating unit at Masinloc coal-fired power station. The first unit was financed by the World Bank in 1990 despite opposition from local communities and environmental groups who fear that the project will poison century-old mango orchards, fisheries, and farmland upon which nearby communities depend.

1994 – Theun Hinboun Hydro Project, Lao PDR

The ADB loaned $60 million to the state utility, Electricité du Laos, for its 60 percent stake in the Theun Hinboun Power Company which owns and operates a 210-MW dam for exporting electricity to Thailand. The project is 20 percent owned by Nordic utilities, Statkraft and Vattenfall, and 20 percent owned by MDX, a Thai real estate developer. Completed in 1998, the $260 million dam destroyed riverine fisheries in two rivers upon which dozens of rural communities – or about 6,000 people – depended for their livelihoods. The ADB approved the dam contracts which have restricted the power company’s obligation to pay for compensation and environmental mitigation. Villagers are still waiting for compensation and environmental mitigation measures promised by the power company and the ADB.

The ADB’s commitment to defending dam investors from the real costs of their schemes is evident from its handling of the Theun-Hinboun project. When citizens’ groups exposed the fact that the Theun Hinboun Power Company in Lao PDR had ignored and underestimated environmental costs in order to inflate the company’s profitability, and failed to provide compensation to people harmed by the company’s dams, they demanded that the company take responsibility for these costs. The ADB responded with a warning that efforts to force its client, the Theun Hinboun Power Company, to pay additional costs would damage the confidence of foreign lenders and investors in Lao PDR. The ADB also insisted that it is up to the Lao government, not the company, to either use its revenues or seek out new aid sources to pay for long-term environmental costs. As for the ADB’s responsibility, project engineer Mike Bristol explained recently in Hanoi, the ADB “is not a social and environmental agency,” and as such it has “little influence over project outcomes.”

1994 – Lingjintan Hydro Dam in Hunan Province, China

The ADB loaned $116 million to the state-owned Hunan Electric Power Company for a 240-MW hydro dam which is also expected to regulate releases from the 1,200 MW Wuqiangxi hydro scheme, situated 41 kilometres upstream on the Yuanshi river. Still under construction, the $367 million dam displaced 4,060 people. According to the ADB, people are still waiting for compensation and have been promised income from plantations that could take five to 20 years to materialize. The authorities have forced nearby communities to share their rice land with displaced people, reducing their rice harvests by half. The dam has blocked fish migrations in the Yuanshui river and may also adversely affect fish stocks in Lake Dong Ting. Without land to produce food and no income to buy food, people have left the area to find jobs elsewhere, the ADB reports.

1990 – Singkarak Hydropower Project, West Sumatra, Indonesia

The ADB loaned $185.8 million to Indonesia’s state utility, PLN, for a 175-MW hydro dam. Completed eight years later, the dam devastated fisheries and fishing communities around the Singkarak lake and Ombilin river, disrupted water supplies in two river systems. It also opened up the project area to logging, threatening local wildlife populations, including the endangered Sumatran tiger; the dam also wiped out fish stocks and drastically reduced flows which led to increased incidence of skin and intestinal sickness, and waterborne disease.

1981 – Batang Ai Hydropower Project, Sarawak, Malaysia

The ADB loaned $40.4 million to the Sarawak Electricity Supply Corporation, a state-owned utility, for a 108-MW hydro dam. Completed in 1986, the Batang Ai dam displaced 21 Iban longhouse communities, close to 4,000 people. Fourteen years later, many of those people are still waiting for replacement land or cash compensation promised them by the authorities. Some left without land or enough replacement income to survive have left their once self-sufficient communities to find jobs in Kuching or at industrial sites elsewhere in the country.

1977 – Mae Moh Power Project, Thailand

ADB loaned about $150 million for lignite mine expansion, transmission lines, and the first generating units at this lignite-fired power station in the 1970s. And since 1980, the Bank has loaned EGAT another $390 million for new generating units at Mae Moh, one of the largest point-sources of poisonous sulphur dioxide emissions in Southeast Asia. The Bangkok-based environmental group, TERRA, has described Mae Moh as “one of the most serious public health disasters in Thailand’s history.” At least 42,000 people near the plant suffer chronic respiratory diseases, breathing problems, and skin disorders; livestock regularly fall ill and die; large orchards, vegetable gardens and rice crops wilt from acid rain; streams and waterways are blackened by the emissions as well as by the run-off from the lignite mining operations nearby. In 1996, six villagers from the Mao Moh valley died of blood poisoning, suspected to be caused by sulphur dioxide emissions from the Mae Moh plant.

References available upon request from GrainneRyder@nextcity.com

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