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The World Bank’s watershed decision: Nam Theun 2

David F. Hales
Worldwatch Alert
March 28, 2005

In April, the countries on the governing board of the World Bank will consider a proposed high dam on the Nam Theun River – a decision that will set a pattern for decisions regarding hydroelectric dams around the world for years to come.

Note:This article will be featured in the May/June 2005 issue of World Watch magazine.

For the last thousand years, as kingdoms and countries have fought for sovereignty over Laos’ Nakai Plateau, the people there have learned the lessons of the grasses-to bend before the wind. Life has been relatively predictable, marked by continuity from one generation to the next. But the winds of change are blowing again, and this time the
strategy of the grasses may not work. By April, the countries on the governing board of the World Bank will consider a proposed high dam on the Nam Theun River. Their decision will not only affect those who live here, but will also set a pattern for decisions regarding hydroelectric dams around the world for years to come.

The Nam Theun 2 dam (NT2) is a project of the Lao People’s Democratic Republic (PDR), in partnership with lectricit‚ de France, the Electricity Generating Company of Thailand, and Ital-Thai Development Public Company (jointly, the Nam Theun 2 Power Company Limited, or NTPC). The US$1.3 billion, 1,070-megawatt project would divert 93 percent of the Nam Theun’s flow into the adjacent Xe Bang Fai River basin, generating power for
Thailand’s electrical grid. It would also submerge nearly 40 percent of the Nakai Plateau beneath a 450-square-kilometer reservoir, drastically alter the character of two rivers, displace thousands of desperately poor residents, and disrupt the livelihoods of tens of thousands more, among the other transformations typical of such hydropower projects.

The initial concept was promising. Laos is painfully poor, with few development options. Early estimates understated the number of displaced people and ignored the impacts on those who live downstream, especially on the Xe Bang Fai, so compensation and  resettlement seemed manageable. Thailand seemed to need the power, the engineering is not difficult, and the plan included an attractive conservation component.

What has emerged, however, is much less promising. As documents have been made available and proponents have made their case in public, the inadequacy of the preparation and the lack of response to fundamental questions is surprising, especially after the heavy investments of staff at the World Bank to assist the Lao PDR and its partners to
develop a coherent proposal. Proponents admit that no comprehensive analysis of alternatives to the project has been done. They have refused to disclose NT2’s financial framework (the Concession and Power Purchase Agreements), despite the urging of Bank officials. They are unprepared to document the overall cost of the project, or even the
cost of construction. After 15 years of preparation, NTPC calls the proposal “not a fixed package” and insists that it will be responsible “no matter what the cost is.”

All parties agree on the need for development in Laos. Yet Laos and NTPC provide few specifics on how NT2 will contribute to this goal. The “strategy” for managing project
revenues to alleviate poverty and protect the environment is said to be still “emerging.” No revenue management plan has been finalized, nor are there specific measures to ensure good project management and oversight, transparency of finances, or accountability.

At best, the World Bank estimates, the revenue to Laos from this project will not
exceed $250 million (net present value) over the 25-year life of the Concession. These revenues are largely deferred and will not exceed 5 percent of Lao governmental revenue until at least 2020. If revenue sags, if expenses increase, if implementation is as poorly managed as development, if funds are diverted-then benefits to the poor become
diminishingly small and risks intolerably large.

The future with the dam has been described to those who have been contacted as one of new homes with electricity, new opportunities for irrigated and mechanized agriculture, a diverse economy with reservoir fishing replacing reliance on river fishing, aquaculture replacing capture fishing along the Xe Bang Fai, and intensive livestock raising replacing the traditional extensive grazing pattern. This vision may have been plausible-if the developers had conducted good scientific studies, developed accurate information about resource baselines, and objectively assessed investments necessary to compensate the villagers.

But the hard work and serious investment necessary to make the project a success has mostly not been done. Government professionals from more than a few countries who are trying to assess the project are nonplussed by the lack of project documentation in critical areas and the poor quality of what is available. There are literally no hydrological data available from NTPC, for example. Claims that there are adequate flows to generate enough power for the project to make money are only slightly more believable than the assurances regarding the risks of downstream flooding. The promises about aquaculture ignore inconvenient facts: only one species of fish to be found naturally in either river basin has been cultivated successfully, and there is a serious risk that introduction of non-native species could have devastating impacts on native ecosystems. Even if the invasive-species
problems can be solved, there is no local source of nutrition for farmed fish.

The NTPC posters show tractors and irrigated land-but the company’s own Social Development Plan states that the use of tractors generally should be avoided throughout the resettlement area due to “heavily leached and infertile” soils, which are explicitly described as “poorly suited to crop production.” Without significant inputs of organic and inorganic fertilizer, financially viable agriculture will be impossible. NTPC plans to help pay for fertilizer for only three years.

New fishing opportunities are promised to replace lost ones, even though the Nam Theun basin is so shallow that dam operations will shrink the reservoir by as much as 80 percent during the dry seasons and many experts predict that there will be no substantial  reservoir fishery. The claim that the loss of fisheries due to increased water flows in the Xe Bang Fai will be replaced by increased fisheries in the river’s tributaries is contradicted by project documents that foresee a collapse in the aquatic food chain.

Although detail can be piled upon detail, one conclusion is inescapable. This is exactly the kind of project proposal that the safeguard procedures of the World Bank and the Asian Development Bank are designed to prevent. The risk of further impoverishment of the people, of corruption and mismanagement, and of financial failure of the project is just too high. If Nam Theun is approved, with its inadequate and incomplete documentation, it is hard to imagine a project that would not be. The World Bank will have written a brand new definition of “blank check.”

The Bank seems to grasp what is at stake. It has announced a decision framework for Nam
Theun stating that the project must be embedded in a development framework aimed at poverty reduction and environmental conservation; must be technically, financially, managerially, and economically sound and adhere to the Bank’s environmental and social safeguard policies;

and must have understanding and support within the international donor community and civil society. In a background paper for an informal Bank governing board meeting in November 2004, senior Bank staff identified in detail the serious flaws in the proposal and concluded, “The project’s ability to have a positive effect . . . cannot be ensured without major reforms in governance, sufficient progress on human development and natural resources management, and compliance with the Bank’s safeguards policies.” The necessary changes should, of course, be agreed upon before any decision is made. But even if they are, the Bank understands that the risks are so significant that it is pursuing
an unprecedented agreement with Laos and key donor governments stipulating that any failure by Laos to abide by its obligations would jeopardize all external support.

NTPC needs the financial backing of the World Bank and the Asian Development Bank. But the dam is a critical test of the World Bank’s own policies (as well as a direct challenge to the recommendations of the World Commission on Dams). Bank officials should release a detailed analysis of how the proposal meets its fundamental standards, and the governments represented on the board, which will make the final decision, should also be fully transparent with their own assessments of compliance. Finally, legislatures should insist on hearing the positions of their governments in public session, in advance of consideration at the Bank.

It is time that the Bank board makes clear its position on massive hydroelectric projects. NT2 will be the example others follow.

David F. Hales is Worldwatch’s Counsel for Sustainability Policy. He chaired the World Bank’s U.S. public workshop on Nam Theun 2 in September 2004.

For more information, please CONTACT:
Darcey Rakestraw, Tel: 202-452-1992, ext. 517
E-mail: drakestraw@worldwatch.org

About the Worldwatch Institute:
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