Wayne C.White, Ph.D.
Probe International
March 1, 2001

Contents

Abbreviations and conversion

Executive Summary

I. Introduction

II. Project Net Revenues

A. Project Cost

B. Financing sources

C. Repayment requirements

D. Project earnings

E. Financial returns to Lao PDR

III. Stakeholder distribution

A. THPC’s tally of unmitigated project effects

B. Alternative view of impact scope

C. Funds for mitigation

IV. Physical factors

A. Theun Hinboun’s physical features

B. Project reliance on complete diversion

C. Comparison with other regional projects

D. Theun Hinboun unique

V. Regional implications.

A. Is Theun Hinboun replicable?

B. Should the financing model be replicated?

C. Bearing on the proposed Nam Theun 2 project.

D. Infrastructure as a development mechanism

About Probe International

Probe International educates Canadians about the environmental, social, and economic effects of Canada’s aid and trade abroad. Together with citizens groups around the world, we monitor and expose the effects of projects financed by Canadian tax dollars through international financial institutions such as the World Bank and the Asian Development Bank. For more information see http://www.probeinternational.org

Probe International is a division of Canada’s Energy Probe Research Foundation, a leading energy and environmental think-tank which has argued for breaking up Canada’s electricity monopolies since the early 1980s and is helping develop new rules for Ontario’s electricity market. For more information see http://www.energyprobe.org

Probe International’s Power Sector Reform Series

‘ Aid agencies should get out of dam building, Gr√°inne Ryder in Development Today, May  12/2000‘ 2000, Benefit Cost Analysis of Decommissioning the Pak Mun Dam (in Thailand), Wayne White, Foresight Associates. ‘ Peddling yesterday’s technology: aid for large hydro dams must be stopped, Gr√°inne Ryder, Speech to the World Commission on Dams, February 2000.‘ 1999, What Thai Citizens Should Know About Canada’s Nuclear Power Program, briefing by Probe International in association with Energy Probe for Alternative Energy Project for
Sustainability of Thailand.‘ 1999, The Three Gorges Dam: A Great Leap Backward for China’s Electricity Consumers and Economy, Patricia Adams and Gr√°inne Ryder, Probe International. ‘ 1999, Thailand’s Flawed Electricity Privatization: The Case for Citizen-Oriented Reform,  Gr√°inne Ryder, Probe International. ‘ 1999, The Theun-Hinboun Public-Private Partnership: A Critique of the Asian Development Bank’s Model Hydropower Venture in Lao PDR, Gr√°inne Ryder, Probe International. ‘ 1997, The Advantages of Combined Cycle Plants: A “New Generation” Technology, Gr√°inne Ryder, Probe International. ‘ 1997, Reforming Thailand’s Power Sector: Towards a Sustainable Electricity Future, Gr√°inne Ryder, Probe International.

Other publications by Dr. Wayne C. White

‘ A Review of the Se San 3 Hydropower Project Feasibility Study, October
2000.‘ Infrastructure Development in the Mekong Basin, for Oxfam America, July 2000.‘ Benefit Cost Analysis of Decommissioning the Pak Mun Dam, June 2000.‘ A review of the Power Purchase Agreement between the Republic of the Philippines National Power Corporation and a consortium constituting the San Roque Power  Corporation concerning the construction and operation of the San Roque Multipurpose Project, March 2000.‘ Economic viability of Mekong Region Dam projects, delivered at World Commission on Dams Regional Consultation for East and Southeast Asia, Hanoi, Vietnam, 27 February 2000.‘ Structuring Finance for Dam Project Sustainability, for World Commission on Dams, thematic review on International Trends in Project Financing, July 8, 1999.
‘ Making environmental and social assessment relevant for dams, submitted to World Commission on Dams, Web-Conference on EIAs and SIAs for Large Dams, June 3, 1999.
‘ Review of Economic Impact Study: Nam Theun 2 Hydroelectric Project, for International Rivers Network, September 1997.

• ‘ Review of Greater Mekong Task Force Strategies, for International RiversNetwork, August 1997.

• ‘ Nam Theun 2 project economics, for International Rivers Network, July
  1996.

Appendix

Abbreviations and conversion

ADBAsian Development Bank cumecscubic meters per second EdLElectricite du  LaoEGATElectricity Generating Authority of ThailandO&MOperatingn.a.Not availableNDFNordic Development FundNORAD Norwegian Agency for International DevelopmentTHPCTheun Hinboun Power Company, Limited1US$ = 38 baht in calculations unless otherwise noted

Executive Summary

The 210 MW Theun-Hinboun hydropower project in the Lao PDR came online in 1998. It was built and is operated by a new entity named the Theun Hinboun Power Company. A loan from the Asian Development Bank (ADB) was the formative component of project finance. Its economic purpose is given as earning money for the Lao government, through export power sales to Thailand, to use in national development.

Power sales records from two years of project operation have become available at the time of this writing. The objective of this report is to use the power output and revenue history to independently assess the project’s performance and implications.

Applying the compensation terms published by the ADB to the available data, and projecting production assumptions from the two year history, we calculate that the Lao government will take in an average of US$ 25.9 million per year in the first 25 years of project life. Any decrease in project serviceability would progressively reduce or curtail
this cash flow. If the project remains fully serviceable an additional fifteen years, the likelihood of which we cannot rate at this time, then in years 26 through 40 we calculate the Lao government will take in an average of US$44.9 million annually. These earnings
compare favorably with Lao obligations to repay the original loan to the ADB. We calculate that the original $60 million loan can be repaid with annual transfers of US$2.6 million in years 11 through 40 of project life.

Based on these calculations, although project returns are so far an average 23 percent below projected, the financial performance of this project from the Lao government
perspective is quite good.

The proposed Nam Theun 2 dam project will, if built, undermine Theun Hinboun’s productivity, which, in addition to concerns about its own economic viability, should
be a strong caution against its construction. The proposed Nam Theun 2 project’s location is upstream on the same river which powers Theun Hinboun. It will impound the water of the Theun River, and divert it to a different river basin. They are not compatible projects, and the Nam Theun 2 project would undercut the function of Theun Hinboun by denying it water. This is in addition to previous findings which raise the possibility that Nam Theun 2 will be a money losing and uneconomic project, with a large impact on persons, aquatic species, and the upland ecosystem.

The Theun-Hinboun project has created as yet unmitigated social and environmental damages.
The THPC has calculated that over 10,000 households are enduring socioeconomic
impact, and that there are a number of unresolved environmental impacts too. As a result, they are adopting a “Mitigation and Compensation Program.” An alternative review by Bruce Shoemaker suggests that the THPC report significantly understates the project’s negative impacts, and critiques the proposed mitigation and compensation measures as
unresponsive to those directly affected. Financial analysis informs one aspect of this debate about how best to achieve adequate mitigation and compensation of the Theun-Hinboun project’s negative effects.

There is enough money from project returns to provide remedies to all negatively affected stakeholders. It is not possible to generalize from Theun-Hinboun’s positive financial  performance that other hydropower projects in the region are viable. Of the major hydrodam projects built or proposed in the Mekong Basin, Theun Hinboun is unique in the
physical features which result in its positive financial returns. Its structural scale, therefore capital cost, is low in relation to its dependable capacity. The source river has sufficient flow to maintain year-round production, although not at installed capacity in all months, and only at the cost of diverting all water during the dry season, leaving no flow in the downstream river. If Theun-Hinboun was required to maintain minimal releases to the source river downstream, a common international standard, its financial feasibility would also be in doubt.

A constraint to viewing Theun Hinboun as an acceptable model for replication of contractual arrangements is that it was implemented without prior informed consent
of affected persons, and failed to assign responsibility or funds for full mitigation of social and environmental effects. Any future project should be structured in conformance with the guidelines articulated by the World Commission on Dams (WCD), including consideration of affects on all stakeholders, their inclusion in a “negotiated decision-making
process,” their “free, prior, and informed consent” before a project begins, and project benefits being shared to fairly compensate people for lost or damaged property, resources, and livelihoods.

1. Introduction

In October 1994 the President of the Asian Development Bank submitted a report to his Board of Directors recommending the approval of a loan for the 210 MW Theun-Hinboun
Hydropower Project in the Lao PDR. The loan was subsequently approved, the project
was constructed at a cost of US$ 280 million, and power from Theun-Hinboun
came online in 1998.

The ADB President’s report gave Lao economic growth as justification for the project. Power was intended to be exported to Thailand, and the resulting revenues were projected to be well in excess of costs, mainly consisting of construction cost repayment.
Earnings from the project would accrue to the Lao national budget, seen as the “main
vehicle for the Government to deliver social services and redistribute income.”¹

Power sales records from two years of project operation have become available at the time of this writing. The objective of this report is to use the power output and revenue history to independently assess the project’s performance, particularly with respect to the following:

‘ What are the net financial flows (revenues) from this project to the Lao  government?‘ Are all affected parties (stakeholders) benefitting from this project? ‘ Are there physical factors to which the performance of this project can be
attributed?‘ What implications does this project have for other planned hydropower developments in the region?

II. Project Net Revenues

This section examines financing arrangements, costs, and earnings to derive the net  earnings to the Lao government.

A. Project Cost

The ADB President’s report on Theun Hinboun projected a total project cost of US$270 million. Documents posted by the ADB after completion state that the total actual project cost was US$280 million.²

B. Financing sources

A new legal entity, The Theun Hinboun Power Company Limited (THPC), was created to build the project, and to own it for thirty, possibly forty, years. The ADB President’s report
on Theun Hinboun lists sources for the THPC to raise the project budget, anticipated
to be US$ 270 million. These are listed in the following table with one amendment,
as follows. Post completion reports by the ADB indicate that the budget increased
by US$10 million, and that a corresponding increase in the level of export credits
provided for this.³ The sources of finance, therefore, are:

The Lao government
financed
its loan and equity investment in the THPC by borrowing US$60 million
from the Asian Development Bank. Of that amount, the Lao central
government
disbursed $51.5 million to Electricity du Laos (EdL) in the form of
a loan, and EdL used that money to purchase its equity share in THPC.
The Lao central government also loaned $8.5 million to THPC.

C. Repayment requirements

The THPC is responsible for repaying all loan portions of the project’s finance package. Of  course, the THPC’s shareholders would also like to recover their equity investment,
with additional returns, but this must come from project earnings they accrue. Debt repayment has a senior claim on THPC’s revenues.

The ADB President’s
report on
Theun Hinboun does not describe the detailed terms of the commercial
loans or
export credit to be repaid by THPC.^a For the region, and the
time
period involved, it is reasonable to assume a loan rate of ten percent,
for
both commercial credit and export credit.⁴ This assumption is
compatible
with the overall weighted cost of capital given in the President’s
report,^band
with the interest rate being charged by the Lao government for its loan
to the
THPC. We further assume a 25 year loan period.

The $8.5 million loaned to THPC by the Lao government is to be repaid at an interest rate of ten percent “and a repayment period of 16 years including a grace period of 4
years.”⁵ This debt has the same level of seniority as the commercial loans and
export credit.

The $51.5 million loaned to EdL by the Lao central government is to be repaid at an interest rate of 6.21 percent, “and a repayment period of 25 years including a grace
period of 5 years.”⁶

The $60 million loaned to the Lao government by the ADB will have a repayment period of 40 years, with a grace period of 10 years. The only interest will be a ‘service charge’ of 1
percent.⁷

D. Project
earnings

Earnings to the project
derive
from sale of power to the Electricity Generating Authority of Thailand
(EGAT).

The rate, according to
the
ADB President’s report, is set by a power sales agreement between THPC
and EGAT. As described, EGAT commits to pay “a base rate of $.043
per kWh in 1994 prices, to be increased by 3 per cent per annum commencing
on 1 January 1994 during the four-year construction period and at 1 per
cent per annum for an initial ten-year operating period….The currency
of payment will be 50 per cent Thai baht and 50 per cent US
dollars….”⁸

The President’s report
projected
the following income stream from Theun-Hinboun:

In fiscal 1999 EGAT paid
an
average tariff of US$.040 per kwh, and in fiscal 2000 paid an average
of US$.041. These rates, although lower than $.043, do not necessarily
indicate deviation from the power sales agreement, but may reflect
depreciation
of the baht portion of the tariff against the
dollar.

The earnings from sale
of power
produced by the Theun Hinboun project to EGAT in fiscal 1999 and 2000
are given in the following table.

The revenue, in dollar
equivalent,
earned in fiscal 1999 was US$56.469 million, compared to US$77.432 million
projected in the ADB’s report. In other words, actual was 73 percent
of projected. Available data shows that sales were thirteen percent
higher in fiscal 2000, which would correspond to an annual total for
fiscal 2000 of $63.895 million, or 82 percent of projected
sales.

E. Financial returns to
Lao PDR

In order to assess the financial performance of the Theun-Hinboun project, this report includes a calculation of the total annual monetary returns to the Lao PDR. The complete
calculation can be found in the Appendix. This section describes the parameters
and assumptions of the calculation before presenting the results.

This report uses the first two years of Theun-Hinboun’s operational history as a basis for assessing its long-term financial performance. On average, Theun-Hinboun earned 77 percent of the revenue in fiscal 1999 and 2000 projected in the report of the ADB President. This report will apply that finding by assuming that revenue for each year over the project’s life will similarly be 77 percent of projected.^c

The total earnings to the Lao PDR from this project derive from the following sources:

‘ Royalties. THPC pays the Lao government “an annual royalty fee of 5 per cent of gross revenues….”¹¹‘ Taxes. THPC pays taxes to the Lao government at a rate of 15 percent of taxable income.¹²‘ Dividend. The example calculated in the President’s report uses dividends “at 80% of Net Income after Tax.”^{13 d} The precise contractual formula defining the rate of dividends over various levels of project revenue is not given.‘ Loan repayment. THPC makes repayments on the $8.5 million loan.

Calculation of the annual royalty is simply achieved by taking 5 percent of the total payments for electricity received from EGAT.

For calculation of taxes, THPC’s net (or taxable) income is shown by example in the Presidents’ report to be gross revenues minus: operating and maintenance expense (O&M)
(projected to be 2 percent of the capital cost annually), royalty payments, depreciation, and interest expenses. Depreciation is projected to be straight-line depreciation over 25 years, so the annual amount is one 25^th of the capital cost.

The annual dividend to EdL is described in the President’s report as a percentage of net income after tax. Without knowing the full provisions of the contract documents,
however, it is not possible to rule out the existence of further conditions that might affect the dividend calculation. For example, if THPC spends a portion of its revenue making accelerated debt repayments, will that reduce the dividend? Also, it is not known to us whether the other equity partners are protected by any type of minimal dividend payment
provision in the event of low overall project revenue, in which case EdL might receive less than 80 percent of net income after tax as their dividend.

Our calculation of taxable income varies in the following way, with implications for the values of tax and dividend. The example in the President’s report considers
depreciation and interest expense, with interest varying from a high amount in the early years based on the total amount of debt, gradually declining to zero at the end of 25 years. We consider a debt service payment encompassing repayment of principal and payment of interest, that is constant each year for 25 years.

With those parameters and assumptions, and especially assuming that the dividend will be  at the rate of 80 percent, we calculate that the Lao government will take in an average of US$ 25.933 million per year in the first 25 years of project life. Any decrease in project serviceability would progressively reduce, or possibly curtail this cash flow.

The project company is scheduled to repay its loans within 25 years. After that time, THPC’s income would not be burdened with any debt service payments (unless it incurs
further debt), which would benefit the government’s dividend, drawn from THPC’s net income. If the project remains fully serviceable an additional fifteen years, the likelihood of which we cannot rate at this time, then in years 26 through 40 we calculate the Lao government will take in an average of US$44.914 million annually.

These earnings compare favorably with Lao obligations to repay the original loan to the ADB. We calculate that the original $60 million loan can be repaid with annual transfers
of US$2.568 million in years 11 through 40 of project life.

Based on these calculations, although project returns are so far an average 23 percent below projected, the financial performance of this project from the Lao government
perspective is quite good.

III. Stakeholder distribution

If an infrastructure project, such as Theun Hinboun, built as an instrument of national development, is beneficial, it should be so for all affected parties. That is, project
returns should not only exceed full economic costs, they should be mobilized
for mitigation and/or compensation that leaves no stakeholder worse off than before.

For that reason, this review of Theun Hinboun’s performance, having examined financial returns, now considers other project effects. As the World Commission on Dams has
noted, “Social and environmental issues have historically been among the least addressed concerns in dam-related decision-making….they are two of the key issues that determine whether a dam proves to be an effective development project that enjoys general  acceptance by the public.”¹⁴

A. THPC’s tally of unmitigated project effects

According to the Theun-Hinboun Power Company, there exist an array of unmitigated, negative project effects. The THPC’s mitigation and compensation¹⁵ program report cites the following:

It is in response to
these
and other recorded social and environmental damages that the THPC is
adopting a “Mitigation and Compensation Program.” The planned
program would take place over 10.5 years, and its total cost is budgeted
to be US$4.7 million.¹⁸

B. Alternative view of impact scope

A somewhat different view of the situation is presented in a review of the THPC’s plan by  Bruce Shoemaker,commissioned by the International Rivers Network and released in December 2000.¹⁹ It suggests that the THPC report significantly understates
the project’s negative impacts, and critiques the proposed mitigation and compensation measures.

Shoemaker indicates that the suggested program lacks accountability to local citizens, presents unclear criteria for evaluating project impacts, allocates funds in ways that
may not reach the affected villagers, fails to recognize that citizens have a right to direct and immediate compensation for fisheries losses, and relies on development investments that are not certain to result in benefits to the affected persons. He also notes that the THPC report’s recommendations would endorse and make permanent a policy of no longer
striving to maintain dry season releases downstream, whereas the THPC formerly made a commitment to maintain a minimum flow of 5 cumecs (cubic meters of water per second).

C. Funds for mitigation

There is debate about how best to achieve adequate mitigation and compensation of the Theun-Hinboun project’s negative effects, and the issues have depths that this report
will not go into. From this brief survey, however, it is possible to make a conclusion about the level of spending. Whereas the total planned spending on mitigation and compensation is not more than $4.7  million over project life, if we include revenue accruing to the Lao government as a source, a greater spending level, even by multiples of that amount, would still leave the project with positive financial returns if project performance continues at near present levels. This report is not in a position to recommend any given spending level as optimal, and indeed, the amount of money spent does not necessarily correspond to the amount of good achieved. There is enough money from project returns to provide remedies to all negatively affected stakeholders.

IV. Physical factors

While we cannot overlook its unresolved social and environmental impacts, Theun Hinboun is notable for having positive financial returns to the host government, while other hydrodam projects in the Mekong Basin Region, in Lao PDR, Thailand, and Vietnam, do not. This section discusses the physical factors which favor Theun Hinboun, and considers the degree to which they are unique in the region.

A. Theun Hinboun’s physical features

Theun Hinboun’s efficiency derives from two defining features: its structural scale, therefore capital cost, is low in relation to its dependable capacity, and its installed capacity, that is the size of turbines and associated structures, is matched with dry season flow constraints of its source river.

The project’s type is described as a run-of-the-river, inter-basin transfer. It is not purely run-of-the-river because there is a dam, but it is relatively modest in size. The water retention area behind it is referred to as a headpond rather than a reservoir because of its smaller volume. Water from the headpond flows through a tunnel, powers the turbines, and is released in the valley of a different river, that is, a different river basin. The outflow
river valley is at a substantially lower elevation than the source, which is why the project is able to harness a relatively large height differential with a relatively low structural investment.

Like the rest of the region, the source river, the Theun, is subject to flow volume variations as a result of highly seasonal rainfall patterns. The Theun Hinboun project is sized with consideration of minimal yearly flow rates, and the project is feasible at this scale. In its first two years of operation, Theun Hinboun’s production levels have fallen below forecasted generation during the annual dry season, but the minimum flows in the source river are sufficient to produce substantial percentages of the production goals. This is in contrast, for example, to some high dams, wherein a drop in reservoir levels during a dry season can result in stream flow through the turbines dropping to zero.

Theun Hinboun’s ability to produce power during the dry season does come at a cost to the downstream river. The project’s operators have found that in order to maintain even a  majority of rated production during the dry season, they require all of the river’s water. With 100 percent of the river’s flow being diverted, that leaves the downstream reaches of the river dry, with consequences for all of the river’s aquatic life as well as for riverside
residents. Nordic Hydropower, a partner in THPC and key project developer,
would not have been allowed to divert all of the river’s flow if this project were located in its home country of Norway, as has been pointed out by Grainne Ryder in her 1999 article.²⁰

B. Project reliance on complete diversion

According to the THPC’s Mitigation and Compensation Program report:

The river section between the Dam Site and the Nam Mouan junction is receiving inadequate post-project flows to prevent profound environmental changes taking place. If one were to set the criteria for flow changes allowing “acceptable”
environmental change….riparian releases would be needed would be needed to provide flows downstream of the dam equal to 50% of the 1:20 dry year [driest year to be expected in any given 20 years]. Such riparian releases would represent nearly 8 (eight) times the present riparian releases, reducing the  potential revenues of the project by about 8 million dollars per
year.²¹

The report goes on to reject such decrease in revenue, and instead call for giving up on any  dry season minimal release.

While losing the 8 million dollar a year revenue decrease cited in the report would be a blow to the THPC’s finances, it does not describe the full financial risk. Under the license agreement which governs THPC’s operation of the project and sale of power, it is to operate the project at “a guaranteed availability of 85 percent.”²² For a 30 day month,
operating the turbines at full capacity this often would produce ((210 MW capacity)(85%)(30 days)(24hours/day)) equals 128.5 thousand megawatt hours per month
(128.5MWh).^e
Yet already the output in the dry months is far less than this. In February, March, and April of 1999, Theun Hinboun produced and sold 53.9, 50.9, and 66.3 MWh per month,
respectively.^f Let’s assume that 1999 was the “1:20 dry year” referred to in the THPC report; the actual driest year in 20 may have even less water. Providing half of the dry
season flow for riparian release, instead of the one sixteenth referenced in the THPC report, would have left water enough to have produced 27.1 MWh in the month of March. This production is only 21 percent of the desired 128.5 MwH per month. In other words, it corresponds to a project of only 44 MW capacity that has ‘a guaranteed availability of 85 percent’ (per the license agreement terms).

The low monthly production that would arise from maintaining minimal releases in the dry months would invite a reaction by the Thai purchaser of the Theun Hinboun’s power output. The ADB President’s report gives one example of the lower tariff Thailand pays for less reliable power:

Exports of electricity from the [Asian Development]  Bank-financed 45 MW Xeset hydropower plant in the southern part of Lao PDR began in mid-1991. Since Xeset is a run-of-the-river scheme with limited capacity during the dry season,
exports are paid at a flat rate of $0.029 per kWh.²³

Application of the rate to Theun Hinboun, for which the base rate for power purchases is presently $.043 per kWh, would represent a 33 percent decrease. The total impact
under this scenario includes not only a decrease in the total amount of power produced (the $8 million cited in the THPC study corresponds to about 195 MWh per year) but also a 33 percent decrease in the tariff paid for all power produced. This level of decrease to revenue would threaten the financial feasibility of the project and the project company.

C. Comparison with other regional projects

The proposed Nam Theun 2 project is also intended to utilize inter-basin transfer, but the  differences between it and Theun Hinboun are profound. Where Theun Hinboun is nominally run-of-the-river, Nam Theun 2 utilizes large, reservoir storage. The design
of Nam Theun 2 CENTERs around flooding a broad upland valley, with water being drawn off for power generation at a point distant from the dam. The project cannot, therefore, be scaled down beyond a certain size because the dam has to be high enough to back water up to the diversion point. The turbines to be installed will have a combined capacity of 630 MW (or greater by some design variants), or at least three times that of Theun Hinboun. This greater installed capacity is called for despite the source river flow being less; in fact the source river is the same one (more on this below) before the entry of a major tributary.
The cost of Nam Theun 2 is to be 1.3 billion US dollars according to the World Bank (some estimates run higher), more than four times the cost of Theun Hinboun.

The Pak Mun dam in Thailand is also a so called run-of-the-river type, and, as such, was intended to be the first of many similar dams on the Mekong and/or on the mouths
of its tributaries. Although not a “high dam,” it relies on water pressure from impounded backwater to drive a turbine mounted in or near the dam, in this case within the dam structure itself. In distinction to the great vertical differential utilized by Theun Hinboun
as an inter-basin diversion dam, Pak Mun only has a vertical drop to utilize of less than the dam’s height of about ten meters. Pak Mun has proven to vulnerable to both the dry and the wet seasons. During the dry season, there is a scarcity of water to turn the turbines.
During monsoon season, the downstream water backs up against the dam, eliminating the pressure differential needed to turn the turbines since the water pressure below the dam is as great or nearly so as that above the dam.

Many of the dams built in the region, such as the Yali Falls and Hoa Binh Dams in Vietnam, or proposed, such as the Se San 3, also in Vietnam, are “high dams.” They have a capital cost corresponding to the scale of dam structure. High dams with their large reservoirs are generally intended to regulate flows throughout the year, but in each of the examples cited, they have been unable to cope with the seasonality of rainfall in the Mekong region.²⁴
This has left them with them with insufficient flows in the dry season to produce power at the supposed dependable capacity levels. In some cases, reservoir levels have fallen below inlet levels, placing power production levels at zero.

D. Theun Hinboun unique

We cannot rule out that another site may someday be identified in the region, amenable to a similar interbasin transfer, but until then, the following statement holds sway. Of the major hydrodam projects built or proposed in the Mekong Basin,^g
Theun Hinboun is unique in the physical features which result in its positive financial returns.

V. Regional implications

If the Theun Hinboun project is a financial success, what are the broader implications for Lao PDR and the region? Should it encourage the construction of more hydro-dams?
Does it say anything about the desirability of this sort of big infrastructure project as a national development strategy? Does it have implications for particular proposed projects? This section examines these regional implications.

A. Is Theun Hinboun replicable?

The success of Theun Hinboun cannot be taken as a broadly applicable indicator that hydropower projects are beneficial in the region. The physical parameters of every project
are different, and they must be evaluated on an individual basis. As demonstrated in section IV of this report, the physical features which determined Theun Hinboun’s viability are so far unique among major projects built or proposed for the region.

B. Should the financing model be replicated?

This study has not examined the contractual documents nor detailed cash flows and cannot answer this question fully, but project performance is clear regarding shareholder inclusion and financial return to the government.

The contract documents, which this study maintains are inseparably linked with the issue of finance arrangements, were implemented without the prior informed consent of affected persons, and failed to assign responsibility or funds for full mitigation of social and environmental effects. This shortcoming has come back on the project, as unmitigated impacts are only now being addressed, and any future transaction that uses this project as a model would do well to amend these deficiencies.

Any future project should be structured in conformance with the guidelines articulated by the World Commission on Dams (WCD).²⁵ The first three WCD guidelines make it clear that not only should the impacts on all stakeholders (including affected persons) be fully considered, those persons should be involved in a “negotiated decision-making process,” with any commitment to undergo a project that will affect them being made with their
“free, prior, and informed consent.”²⁶ Guidelines 17 through 20 fall under the general principle of “recognizing entitlements and sharing benefits,” and the last of these specifically addresses “project benefit-sharing mechanisms.” Thus any future project
attempting to use the finance structure of Theun Hinboun as a model will have to make substantial improvements on it, as Theun Hinboun does not incorporate these principles, which have been recently re-articulated as WCD guidelines.

This financial model has provided a desirable degree of revenue to the host government,  through its combination of revenue mechanisms. It is notable for generating revenue for the government from early stages of project life. It protects the government by having a portion of revenue that is generated from gross receipts, while including the government as an equity partner also.

C. Bearing on the proposed Nam Theun 2 project

Nam Theun 2 would be built upstream on the same river which powers Theun Hinboun. It will impound the water of the Theun River, and divert it to a different river basin. Theun Hinboun was originally proposed as an alternative to Nam Theun 2, and should be viewed that way. They are not compatible projects, and the Nam Theun 2 project would undercut the function of Theun Hinboun by denying it water.

Our previous work indicates that Nam Theun 2 has a significant probability of being a money losing and uneconomic project, while definitely having with a large impact on persons, aquatic species, and the upland ecosystem.²⁷

Economic analysis of the project using realistic values for construction cost, power production, and pricing of power sales determined that the Lao government, far from earning revenue, could lose US$ 95 million or more on Nam Theun 2 if it is built. Combining that with the knowledge it will undermine the income stream from Theun Hinboun should be a strong caution against its construction.

A study was done by Norplan for the Lao government at the behest of the ADB, that ostensibly should have treated this subject of Nam Theun 2 and Theun Hinboun’s mutual
exclusivity; it has not. The Water management Plan for the Nam Theun/ Nam Hinboun²⁸ avoids any direct treatment of the obvious question of whether Nam Theun 2’s diversion of water will leave Theun Hinboun as a non-functional, money losing project. The closest
it comes are statements such as:

Upstream projects such as NT2 and NT3 are likely to operate their schemes for maximisation of their own income from power sales without consideration of downstream projects or their water needs.²⁹

It goes on to say that Nam Theun 3 could be operated to benefit electrical generation by Theun Hinboun by seasonal regulation of water to be re-released into the Theun River channel from upstream. It stops short in the Executive Summary of making the equally obvious observation that Nam Theun 2 would divert water from the Theun (whether the Nam Theun 3 is built further upstream or not) before it reaches the Theun Hinboun facility. One reason for the omission of any warning against the advisability of building Nam
Theun 2 is the inevitability the Water management plan attributes to the construction of Nam Theun 1, 2, and 3 in addition to Theun Hinboun; it maintains that planning “must be based on at least 4 advanced project studies, all carried out by separate groups of developers….”³⁰ In fact, it is not inevitable that uncoordinated groups be allowed to build mutually injurious projects, with the resulting wastage of public resources.D. Infrastructure as a development mechanism

The ADB President’s report on Theun Hinboun, as referenced above, cited earnings accrual to the Lao national budget, which would be the “main vehicle for the Government to deliver social services and redistribute income.”³¹

An in-depth assessment would be required to establish the effectiveness with which Theun Hinboun earnings are being put to use for national development. Certainly uncompensated affected persons would question the social benefit. If “deliver[y of] social services” and
income redistribution are the standards, it is too soon to say whether Theun Hinboun is successful.

Endnotes

^anor do we have access to this information from any other source.

^bThe President’s report does state an “overall weighted real average cost of capital for the project of 10.2 per cent.”

^cThe ADB President’s report projects that power production will fall to 1.312 million kwh in 2001 and
thereafter. The output in 1999 and 2000 exceeded that amount, so a proponent could
argue that the earnings projections will apply from 2001 onward, although projections were not met in the first two years of operation. The given assumption, however, was chosen as the more conservative
scenario.

^dIt is not clear why the President’s report does not clearly declare the dividend to be 80 percent, or what qualifications may exist in the contracts.

^eIndeed in the wet months the project has met or exceeded this level of production. For six months in 1999 production exceed 128.5 MwH/month.

^fIt is possible that the power purchasers are already questioning the project’s conformance with contractual terms on the basis of current dry season shortfalls.

^gWith the possible exception of the extreme headwater areas in Chinese controlled territory which were not examined for this study.

1. Asian Development Bank, Report and Recommendation of the President to the Board of Directors on a proposed loan to the Lao People’s Democratic Republic for the
Theun-Hinboun Hydropower Project, October 1994, Section K, Para 78, p 24

2.Theun Hinboun Hydropower Project in Lao PDR (Loan No. 1329),
http://www.adb.org/gms/loan-1329.

3.Ibid.

4. Telephone conversation with Professor David Dapice, Macro-economist, Research Fellow, The Vietnam Program at Harvard University, December 11, 2000.

5.Asian Development Bank, Report and Recommendation…, p ii.

6.ibid.

7.ibid, p 14.

8.ibid, p 11.

9.Asian Development Bank, Report and Recommendation…, Appendix 7, p 2.

10.Electricity Generating Authority of Thailand, EGAT Electricity Purchase from Laos and Malaysia, for fiscal years 1999 and 2000.

11.ibid, p 10.

12.ibid.

13.ibid, p 37.

14.World Commission on Dams, Dams and Development: A New Framework for Decision-Making, Earthscan Publications Limited, London and Sterling, VA, November 2000, p
182.

15.The Theun-Hinboun Power Company’s Mitigation and Compensation Program, submitted for approval September 2000.

17.Ibid, Tables A through F.

18.Ibid, p 18.

19.Shoemaker, Bruce Theun-Hinboun Update: A Review of the Theun-Hinboun
Power Company’s Mitigation and Compensation Program, December
2000.

20.Ryder, Grainne
The Theun-Hinboun public-private partnership, October
1999.

21.The Theun-Hinboun Power
Company’s Mitigation and Compensation Program, p 3.

22.Asian Development Bank,
Report and Recommendation…, p 11.

23.Ibid, p 4.

24.White, Wayne C.,
A Review of the Se San 3 Hydropower Project Feasibility Study,
October 16, 2000.

25.World Commission on Dams.

26.Ibid, p. 278.

27.White, Wayne C.
Nam Theun 2 project economics, July 1996. Also, White,
Review of Economic Impact Study: Nam Theun 2 Hydroelectric
Project,
September 1997.

28.Norplan A.S. Ministry of Industry and Handicrafts, Hydropower Office, Water
Management Plan for the Nam Theun / Nam Hinboun, Lao PDR, Final Report, April 1997.

29.Ibid, p 7.

30.Ibid, p 6-1.

31. Asian Development Bank, Report and Recommendation, p 24.