Dow Jones Newswire
May 12, 2005

More than a decade after the project was first conceived, financing for one of Southeast Asia’s most controversial investments is finally in place.

Hanoi: More than a decade after the project was first conceived, financing for one of Southeast Asia’s most controversial investments is finally in place.

Last week, seven Thai banks and nine international ones pledged to lend $1 billion in U.S. dollars and Thai baht to the $1.25-billion Nam Theun II hydropower project (NT2) in the Lao PDR.

Bond-related facilities worth $130 million and equity commitments worth $450 million will complete funding for the project, which will be: “the largest ever foreign direct investment into the Lao PDR,” the Nam Theun Power Company said in a statement.

But will the mega dam – which will displace over 6,000 people and destroy unique animal habitats – help the economy of one of Asia’s poorest countries to grow, as its proponents say it must, or will it hinder development?

The Nam Theun II dam, due to produce 1,070 megawatts of power when fully operational by late 2009, will be built by EDF International, a subsidiary of Electricite de France (EDF.YY) and its consortium partners: Electricite de Laos, Thailand’s Electricity Generating Public PCL (EGCOMP.TH) – affiliated to EGAT – and Italian-Thai
Development PCL (ITD.TH).

The consortium will own and operate the plant for 25 years before handing it over to the Lao government.

NT2 is expected to generate gross income of around $5 billion during that 25 years, of which around $2 billion – the same amount as total Lao gross domestic product in 2003 when official figures were last released – will flow into the nation’s coffers in the form of
royalties, dividends and taxes.

Once the project is nationalized in 2034, Vientiane can expect annual revenues of around $240 million, more than half of current export earnings each year.

Big Earner, Big Risks

Those in favor of the project say NT2 will give Laos the shot in the arm it needs to attract new investment from overseas. The project’s scale, they say, will raise Laos’ profile and convince firms operating in key sectors like mining and timber to take a second look at the country.

They also point to the benefits of new jobs and capital inflows that the project will create: both are expected to increase spending power.

Hydropower is Laos’ largest potential earner and the government has pledged to plow revenues from NT2 into much-needed poverty reduction schemes, proponents add.

But those less enamored of the dam say it could, by virtue of its size, overwhelm the tiny landlocked country’s economy.

The inflow of so much foreign exchange as the dam is being built and once its starts to sell power to Thailand risks pushing up the fragile Laotian kip, which in turn could mean “the country becomes uncompetitive,” said a foreign economist in Vientiane.

With higher costs, Laos would be less able to attract investment into manufacturing and other industries it needs to break out of poverty.

At the same time, a rapid increase in foreign exchange reserves could drive up inflation – something the government has spent the last few years trying to bring under control – and raise prices further, the economist added.

These problems represent “a long term challenge” because foreign exchange won’t begin to build up until the dam comes on line in 2009, although with proper monetary policies and financial management, the risks “can be managed,” he added.

But therein lies the problem.

Opponents of the dam worry that the country’s Communist government, already slow to reform its inefficient economy, may see the windfall earnings of around $2 billion over the next 25 years as an excuse to slow further its on-again-off-again reform program.

NT2 Has World Bank Political Risk Guarantees

Its recent “macroeconomic performance has been relatively encouraging, … (but) advancing the agenda of structural reform has proved more challenging, especially with regard to … strengthening expenditure management,” the IMF said in a January 2005 Public Information Notice.

“Many countries that have benefited from these projects have wasted the money,” the economist said.

The World Bank, which has provided political risk guarantees for the NT2 project, is aware of the risks.

To try to mitigate them, the Bank has put in place a series of checks and balances designed to ensure that revenues are withheld if reform and transparency promises are not kept. It hopes that dangling the carrot of hard cash will energize the government’s reform agenda.

Yet the final say over who gets what money rests with Vientiane’s Ministry of Finance, which will manage a special central bank account to hold NT2 earnings until they are reinvested in the economy. The temptation to squander millions of dollars could be strong.

“Delays in the implementation of the Public Expenditure Management Strengthening Program could mean that the key elements … are not in place by the time NT2 is commissioned,” the Bank said in a March 2005 brief.

For now, no one knows how the government of Laos will respond to its upcoming massive injection of funds.

“We will need another five to 10 years to know the answer,” said the economist.

(Catherine McKinley has reported on Vietnam’s economic development for the past six years. Previously she reported on China’s financial markets for Dow Jones Newswires in Shanghai.)