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Dam project in Laos acts as test case for World Bank

Amy Kazmin and Andrew Balls
Financial Times
February 16, 2005

The World Bank’s board will be asked in the next few weeks to endorse a $1.3bn dam in Laos worth nearly as much as the gross domestic product of one of the world’s poorest countries. For the Washington-based lender, however, the stakes are much higher
than the $50m (€39m, £27m) partial loan guarantee it would offer to secure financing from a consortium of western and Thai banks.

The Nam Theun 2 dam is a test case of the leading development institution’s intention to return to the funding of large-scale infrastructure a decade after it unofficially withdrew in the vain hope the private sector would fill the gap.

Its approval of a project led by Electricité de France would be motivated by a belief that such projects are needed to promote growth and combat poverty.

By selling electricity under a guaranteed contract to Thailand, Laos is expected to earn $2bn a year over 25 years a tenth of annual government revenues. Average income in Laos is less than $1 per day and the country has little industrial capacity.

“Only projects like this offer any possibility for development in the country,” argues Homi Kharas, the World Bank’s chief economist for East Asia and head of its poverty reduction and economic management unit. “It is a chance to jumpstart development.”

This time the bank says it is taking a new approach, consulting widely and reviewing environmental, social and political risks. Damming the Nam Theun river will require moving 6,000 people while disrupting the livelihood of another 40,000 who rely on fishing in the Xe Bang Fai river, to which water will be diverted. At the bank’s insistence, the consortium will compensate those affected, as well as building homes and securing work for those who are relocated.

The political risk in dealing with the unpredictable Lao government and the bank’s expertise in environmental and social assessments make its involvement a prerequisite for private sector financiers.

As one World Banker puts it, Nam Theun “encapsulates a perfect storm of development” an ambitious scheme, with serious environmental and social consequences, in a deeply impoverished country which has unaccountable rulers, and few other options.

If financial flows were all that mattered for development, there would be no discussion of the “resource curse” in countries such as Nigeria, where oil wealth has been more of a hindrance than a help. Development aid would also have a better track record.

Fiscal transparency is a new concept for a secretive regime such as Laos, which only a few years ago did not publish a budget.

As with an equally controversial oil pipeline project between Chad and Cameroon, the bank is prepared to gamble it can ensure the transparent use of revenues for development goals.

The bank’s greatest concern is to ensure that the proceeds will be widely shared and contribute to Laos’s development.

Laos has pledged that the revenues will be spent on education, health and rural development, and has agreed, reluctantly, to face external scrutiny of its use of the proceeds. Unlike in Chad, however, the revenues will not be ring-fenced but will flow through the overall government budget.

If the bank’s board approves the project as widely expected bank staff contend that the benefits will spread far beyond one project to areas such as budget and administration.

“Laos has never gone before an international audience before to explain its development strategy, nor has it consulted locally,” says Mr Kharas. “It is a mindset change.” Bowing to protests from non-governmental organisations would send a damaging signal that the bank was unable to move ahead with big, controversial infrastructure projects, say bank staff.

One result of the bank’s reluctance in the 1990s to dirty its hands with infrastructure projects was that China and India simply pressed ahead with big dam projects without its involvement and without its environmental and social safeguards.

If the bank were to decline support for Nam Theun 2, the expectation is that China would step in to help finance the project as part of its efforts to boost its regional power.

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