Grainne Ryder
Yale School of Forestry & Environmental Studies
November 5, 2006

Full text of presentation at the Global Perspectives on Large Dams Conference: Evaluating the State of Large Dam Construction and Decommissioning Across the World. The speech was published in a report of the conference held November 3-5, 2006.

Good afternoon.

I’d first like to thank the organizers for the opportunity to participate in this very timely conference. Based on my experience monitoring aid-financed large dams and working with dam affected communities over the last twenty years, I firmly believe the world needs fewer large dams, and that our multilateral development banks and aid-donor governments must stop subsidizing them.

To make my case, I decided to focus on one large dam in particular, called the Nam Theun 2 (NT2) Dam in Laos, a former French colony in Southeast Asia. NT2 was approved by the World Bank last March after an aggressive public relations campaign led by the Bank to persuade donor governments that NT2 would not be a development failure, but would set a new standard for dam builders.

The Bank tells us that NT2 is Laos’ best chance to earn revenue for reducing poverty. By selling power to neighbouring Thailand, the dam is expected to generate nearly US$2 billion for the Lao government over 25 years. That money, according to the Bank, will go to poverty alleviation and it will help preserve the 2,000-square kilometre Nakai-Nam Theun watershed, one of Asia’s few remaining intact tropical rainforest and wildlife habitats.”

`NT2 sounds like a miracle dam. According to Dr. Lee Talbot, former U.S. presidential advisor and member of the Nam Theun 2 Panel of Environmental and Social Experts, “Large dams in our experience are almost never environmentally benign or beneficial, nor do they end up benefiting the local people involved. However, because of the cooperation between the [Lao] Government, the [Nam Theun 2] developers, and the World Bank… planning and preparation is different for this project.”

And Dr. Talbot is right, NT2 is different. But does it set a new standard for the dam building industry? Or is it just another billion-dollar disaster in the making?

World Bank: Financing the Unbankable Dream

Well, first it’s important to understand why and how NT2 is different.

Unlike Bank-financed dams in the past, which were usually state financed and owned, NT2 is structured as a Build-Own-Operate-Transfer project. The Nam Theun 2 Power Company is a multinational entity, only one-quarter owned by the Lao government. The rest is owned by the French utility giant, Electricité de France (EdF), a Thai power company, and a Thai construction company. (A Canadian firm, Klohn-Crippen, has the construction supervision contract, and much of the powerhouse equipment is expected to come from the same countries that supplied export credit – i.e., Sweden, Germany.)

NT2 was financed using what’s called limited recourse or project financing. The shareholders first contribute some equity then link with debt providers. If the project fails, the lenders have limited recourse to the company shareholders’ assets. For commercial lenders to commit funds on this basis they need two things: guaranteed cash flow and a carefully negotiated risk allocation scheme. Both took many years and many lawyers to negotiate; the public had no part in these negotiations. Staged consultations with local people came much later in the Bank’s PR campaign, well after the most important decisions had already been made.

Key NT2 Contracts include:

• the concession agreement – this gives the NT2 company the rights to develop, own, finance, construct, and operate the dam, and then transfer it back to the Lao government after 25 years. It identifies impacts and who will assume responsibility for the project’s resettlement and environmental mitigation programs. It also caps the company’s financial contribution to those programs. So the risk of rising costs and/or failure to improve affected people’s lives or mitigate damages is allocated to the Lao government, not the power company.
• the power purchase agreement – this obliges Thailand to buy most of the dam’s output at a fixed price over 25 years, on a ‘take or pay’ basis. This means Thailand’s Electricity Generating Authority (EGAT) guarantees the company’s cash flow even if it doesn’t need the power, and even in dry months of the year when the dam’s output is low or even zero. So Thai ratepayers are paying for NT2 regardless of its performance, or whether they need the electricity or not. This contract is further guaranteed by the Thai government in the event that EGAT were to terminate the power purchase agreement or do anything to jeopardize NT2’s debt payments.
• the construction contract – between the power company and its head contractor, EdF. It caps engineering and construction costs, thereby allocating the risk of cost overruns to EdF, not the lenders or the Lao government. So French taxpayers are on the hook for any cost overruns incurred by EdF.

So the entire web of NT2 contracts is designed to assure lenders there will be no surprise liabilities, and that the power company’s cash flow is secured against key risks (i.e., government interference, less water than estimated, geotechnical surprises, construction cost overruns, and open-ended costs associated with resettling people and trying to minimize the environmental impacts of the dam’s operations).

World Bank: Providing Comfort to Commercial Lenders

In addition to the contractual arrangements, the World Bank then had to arrange special risk insurance. Otherwise, commercial lenders were unwilling to risk their capital in Laos. They not only wanted insurance against the traditional political risks of currency inconvertibility, expropriation, war and civil disturbances, they required protection from breach of contract on the part of either the Lao government or the buyer of NT2 power, EGAT.

So here’s how it works: if there is a default on loan payments to the commercial lenders due to any kind of contract breach, the World Bank, the Multilateral Investment Guarantee Agency, and the Asian Development Bank have committed a total of US$183 million that would be paid out in compensation to the commercial lenders. Those funds would be retrieved from the Lao government later. In theory, this gives the Lao government a strong incentive not to run off with the dam’s revenue while giving commercial lenders what the Bank calls “comfort.”

So while commercial lenders take comfort from NT2, Laotians have a great deal of discomfort ahead. First, their land and two major rivers have been effectively expropriated for the benefit of a single power company. The dam will flood 450 square kilometres of the highland Nakai Plateau, displacing 6,000 ethnic minorities, and destroying some of Asia’s last habitat for elephants, tigers, and dozens of rare and endangered bird and wildlife species. Fisheries in the two affected river systems will collapse – as water from one Mekong tributary (Nam Theun) will be diverted to a powerhouse and then discharged into a second Mekong tributary (Xe Bang Fai). Anywhere from 40,000 to 100,000 people living downstream will lose all or part of their fishing and farming livelihoods.

To my knowledge, at no time did the World Bank advise the Lao government or the developers to consider less damaging alternatives – and by the way Laos has dozens of potential hydro sites. The Bank consistently argues that no other dam could generate the kind of revenue NT2 promises – with its installed capacity of 1075 MW – and therefore NT2 is Laos’ best option for revenue-generation. In other words, the Bank has no environmental limits: no dam is too destructive as long as the revenue stream is big enough.

The Bank’s social and environmental staff were also determined to “get one right” this time, their idea being that with enough aid and consultants cruising around the Nakai Plateau, nobody will be left worse off. So far this has generated enough paperwork to dam the Mekong.

The resettlement plans call for tripling the incomes of six thousand resettlers within the project’s first seven years (that’s equivalent to the national average income of US$1,200 a year) plus health care, education, electricity, schools, roads, community forests, land title, you name it. Same for the tens of thousands of affected people downstream… there are to be no dam victims this time, just satisfied project beneficiaries.

The problem is restoring people’s livelihoods, turning victims into beneficiaries, is much easier said than done. Just last month, the Asian Development Bank reported that: “Full development of sustainable livelihood programs remains the biggest challenge.” Turns out, the new farm plots for resettlers are unsuitable for rice production, there isn’t enough grazing land for people’s livestock. Reservoir fisheries will take years to develop if ever. The economics of pulpwood plantations isn’t there. Same for pumped irrigation. None of the so-called “livelihood options” bandied about by consultants come with any evidence of economic viability or guaranteed results. As the company noted before NT2 was approved, there is “uncertainty whether livelihood programmes will be able to deliver the targeted income levels…. [And] if the plans fail, if only in part, [resettlers’] lives will be impacted negatively in a very direct way as they bear the risks disproportionately.”

They bear the risks disproportionately. And this is precisely why NT2 should not be subsidized with public funding. Tens of thousands of people, not just those resettled, bear the risks disproportionately. And they do so involuntarily without knowing the full extent of those risks. Make no mistake Laotians have been told only what the proponents want them to hear.

How do the World Bank and ADB respond to this? They say don’t worry, we have safeguard policies, we will not NT2 fail. What this means is the banks are ready to drive Laos further into debt with more loans to throw at problems created by NT2. Clearly, this is no cause for accolades.

As for biodiversity conservation, dams like NT2 destroy habitat, they don’t protect it. Yet the Bank says NT2 is a model because US$30 million will be set aside by the power company for managing the dam’s watershed. Under the Bank’s Natural Habitats policy, this is what’s known as an “offset”: meaning it’s OK to flood half the Nakai Plateau as long as money will go to conservation of the rest of the watershed.

Regrettably, Western conservation groups working in Laos jumped on that bandwagon 10 years ago. As a director for the New York-based Wildlife Conservation Society once said, “It’s all about money, money to train people, hire staff, for vehicles, buildings, for all kinds of things which do not exist in that area one bit right now.” So today’s NT2 watershed management budget of more than US$8 million includes money for boats and boat drivers, cooks and mechanics, solar-powered refrigerators, binoculars, air-conditioned offices, satellite TV, portable computers, ranger stations… everything to accommodate visiting wildlife biologists.

Will any of this save wildlife? Not likely. The plans clearly state: “When the reservoir fills, wildlife will be drowned, displaced or stranded on the islands formed.” The conservationists know animal rescue programs don’t work. They know once the Plateau’s special mix of grassland and wetland is flooded, it can not be recovered. They know that once the watershed is opened up by highways and up to 10,000 construction workers and their families, loggers and poachers won’t be far behind. And they know that animals that aren’t drowned will either starve or be eaten by prey or killed by poachers.

Instead of standing up for wildlife, a few conservationists struck an illegitimate bargain with the dam builders. Illegitimate because the 6,000 indigenous people living inside the new protected area were not party to this deal-making. Their rights as guardians of the watershed are nowhere close to being recognized by the Lao government. They will soon face so many restrictions on their resource use, my guess is many will quickly join the ranks of loggers and poachers just to survive. And the wildlife so globally prized will disappear along with the forests.

It didn’t have to be this way. Laos could have opted for economic reform sooner rather than later instead of pinning the country’s economic future to an aid-dependent power export scheme. And Thailand has plenty of better options for generating electricity at home.

Had the World Bank rejected NT2 as too environmentally damaging ten years ago, it would have sent an important signal to the Lao government that large dams are unacceptably risky, especially for the poor. The NT2 developers might have sought out smaller scale alternatives. The Lao government might have introduced competitive bidding and an open hydro licensing system that respected citizen’s rights. Aid agencies in Laos might have decided it would be better to help the poor before they become dam victims. And Western conservation groups might have decided to work with indigenous people to save wildlife habitat rather than take money from those who would destroy it.

Had the World Bank shown more economic prudence and less zeal for “getting one right” the world’s rivers and the people who depend upon them might not be so threatened by large dams as they are today.

Notes

1. “Under current market conditions, NTPC would be unable to mobilize the required amount of foreign currency debt without guaranteed support from ADB and others,” said Mr. Robert Bestani, Director General of the ADB’s Private Sector Operations Department (“ADB to Support Nam Theun 2 Hydroelectric Project in Lao PDR,” ADB Press Release, April 4, 2005).

2. MDB risk insurance includes US$91 million from MIGA, US$42 million from IDA, and US$50 million from ADB.

3. The NT2 financiers include: export credit agencies in France, Sweden and Norway, the Nordic Investment Bank (US$30 million), European Investment Bank ($55 million), nine international commercial banks, and seven Thai commercial banks.

4. The company has allocated roughly US$100 million for resettlement and environmental mitigation. Much of this will be paid for with MDB loans borrowed by the Lao government: US$20 million from the World Bank’s soft loan arm, IDA; US$20 million from the ADB. The company is also receiving an additional US$50 million loan from the ADB, and US$36 million from the French bilateral aid agency, Agence Francaise de Developpement.

5. The company has incorporated a number of best practice features into NT2 design and operation – for example, real-time monitoring of river levels downstream so in the likelihood of damaging floods, operations can be adjusted; monitoring of groundwater and surface water quality; and re-oxygenation of water discharged into Xe Bang Fai river (for more details, see the Nam Theun 2 Environmental Assessment and Management Plan, www.namtheun2.com).

6. The United States was the only donor government to NOT vote in favour of Nam Theun 2 last March due to concerns about social and environmental risks. The US Executive Director’s office released a statement as follows: “In accordance with Treasury Department instructions, the U.S. ED abstained from the vote on NT2. Our abstention was based on reservations about the outstanding risk related to environmental and social issues, the Lao PDR’s macroeconomic conditions, and recourse measures if the NT2 project is not implemented as planned. There are also defects in the environmental assessment process, which ran afoul of US legislation regarding MDB projects that have a significant environmental impact” (the defects include inadequate baseline data i.e., fisheries in Theun and Xe Bang Fai).