The World Bank must decide whether it will provide a partial loan guarantee protecting a consortium of investors led by Electricit‚Äö de France – who together would provide 70 percent of the funding – against the risk of investing in a communist country notorious for corruption and a weak legal system.

The World Bank claims Laos, one of the poorest countries in the world, needs the dam, known as Nam Theun 2 or NT2, to lift the country’s five million people out of poverty. By selling 90 percent of electricity generated by NT2 under a guaranteed contract to Thailand, Laos is expected to earn US$250 million (net present value) over 25 years. The Lao government has pledged to spend its share of the dam’s revenue on education, health and rural development under the World Bank’s direction.

But critics, including Probe International, doubt NT2 will benefit the poor. “The Lao government lacks accountability and transparency, and has a track record of squandering foreign aid,” said Grainne Ryder, Probe’s policy director.

In Washington, United States Treasury Department officials have raised questions about the World Bank’s capacity to ensure that NT2 revenues are spent on poverty reduction, given the Lao government’s record of financial mismanagement.

David Hales, a former United States Agency for International Development (USAID) official, and chair of the World Bank’s public Nam Theun 2 workshop in Washington last September, writes that no clear mechanisms for effective oversight have been worked out. Senior Bank staff are aware of the risks.

In a November 2004 briefing, they 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 safeguard policies.”

Initially, the developers wanted an escrow account set up to manage the project funds but this was rejected by the Lao government as an infringement of its sovereignty. If approved, NT2 represents a watershed decision for the World Bank which has not financed large dam projects for 10 years. Big-ticket dams have fallen out of favour in developed countries but continue to be built in the developing world, where they are prone to corruption and harshly criticized for their ruinous social and environmental impacts. Critics also point out that Laotians have been denied other options for development by the alliance forged by the World Bank, the Lao government and the Nam Theun 2 Power Company.

A report by Probe International last year concluded: “Tying the fate of Laotians to [the] construction of a single hydro export scheme is a political trick, one that would be promptly denounced as such by Laotians if Lao PDR was a free country.”

The report argues that if the Lao government opened its doors to private investment, respected the rule of law and recognized its citizens’ land and resource rights, investors and sustainable development would follow. “World Bank financing for NT2 will only encourage corruption and setback reform,” said Ryder.

For more information, CONTACT:
Grainne Ryder, policy director
Probe International
E-mail: GrainneRyder@nextcity.com
Tel. (416) 964-9223, ext. 228