Asian Development Bank

Why consumers and citizens should pull the plug on the Asian Development Bank- part 1 of 2

Grainne Ryder
Creating Poverty: The ADB in Asia, Focus on the Global South
May 3, 2000


Summary Forward to Part 2

The Asian Development Bank should exit from the electricity business. Without market discipline or public oversight, the ADB is a financial and environmental menace, providing a breeding ground for electricity investments that destroy the environment, create poverty, sink Asian citizens in debt, cost taxpayers in donor countries money, and deprive consumers of cheaper, better generating options. The Bank promotes electricity investments without responsibility by transferring the risks associated with electricity investments onto the public sector. It has no enforceable standards for promoting sound investments because it does not respect the rights of citizens and consumers.

The Legacy of Electricity Aid

The electricity systems that generate and distribute electricity in much of Southeast Asia are a product of three decades of foreign aid. Publicly-funded lending institutions, particularly the Asian Development Bank and the World Bank, teamed up with governments to finance large centrally-operated power plants and transmission networks. They advised governments on the policies, laws, and institutions needed to govern electricity production, transmission, electricity prices, on the fuels and technologies to develop, and created the monopoly powers and privileged state utilities mandated to provide cheap and reliable electricity supplies to consumers, whatever the real costs of generation were. The conventional economic wisdom at the time was that governments were best placed to provide the cheapest and most reliable electricity supplies to fuel industrialization and stimulate rural development.

The world expected that with billions of dollars worth of aid capital, free technical assistance, training, and policy guidance, these publicly-owned utilities would be shining examples of sustainable development, in sound financial shape, providing high-quality service to all consumers, large and small, urban and rural, using state-of-the-art generating technologies, operating to the highest environmental standards, and charging reasonable rates for service. But that is not the case.

Instead, these utilities are debt-ridden, owing billions of dollars to their international patrons, the Asian Development Bank, the World Bank, and the Japanese government,. and having difficulty servicing those debts. These utilities have built or made commitments to billion-dollar power schemes that consumers either don’t need, don’t want, or can’t afford. Electricity service, in many places, is crippled by aging, polluting, and inefficient power plants. Expansion plans are opposed by local communities and environmental groups who object to environmentally-damaging power projects. Consumers are being hit with rate increases yet they have no control over the services they pay for, or their source of power and how much they pay for it.

Governments have also allowed state utilities to take away people’s resources without consent or fair compensation. Citizens whose health, resources, and livelihoods have been harmed or destroyed by polluting power plants are powerless to hold power producers accountable or liable for damages. Rural communities are powerless to stop governments and utilities from taking their resources without their consent or fair compensation. In the last decade or so, unable to finance the uneconomic megaprojects they have become famous for, governments in the region have struck secret deals with Western utilities and companies – extending to them the same powers and privileges that state utilities have always had – allowing them access to other people’s resources without local consent, to pollute with impunity, and to profit from electricity production without taking responsibility for the real costs and risks of their schemes. Some Asian utilities now allow large or politically connected consumers to generate their own power using clean and small-scale generating technologies that can be financed and operated independent of the state-owned system. But millions of ordinary household consumers, meanwhile, remain consigned to buy electricity from costly, massive-scale, and polluting coal plants, or large hydro dams that drown land, destroy fisheries, and impoverish riverine communities. Tens of millions of people still have no electricity service at all.

How did the electricity sector get into such a mess, creating private fortunes for some while draining public finances and impoverishing others? The Asian Development Bank and the World Bank (MDBs) will tell you that there will always be winners and losers in development. They will tell you that past mistakes will be avoided in future. They will tell you that the debt-ridden electricity sector is the result of government incompetence and corruption. They may even tell you that the problem is Asian culture.

But the problems in the electricity sector are much more fundamental and have little to do with Asian culture. Utilities around the world have experienced the same problems but it has only been in the last decade or so that consumers and citizens have begun to understand why and demand changes.

The Asian Development Bank is Part of the Problem, Not the Solution

The problem is investment without responsibility. Electric utilities and their international financiers, such as the Asian Development Bank and the World Bank, are not subject to market discipline or public oversight. Unaccountable aid institutions have lent money to unaccountable governments that, in turn, have given electric utilities extraordinary privileges and powers in the name of public service. The result has been financial and environmental wreckage, costly and unreliable electricity service, and citizens sunk in public debt.

For years, citizens groups and rural communities across Asia have urged the ADB to stop financing environmentally damaging power plants and hydro dams that flood people off their land, create poverty, and destroy people’s resources and livelihoods. They have demanded that the Bank take its share of responsibility for the damages inflicted on communities and environments by ADB-backed power producers.

Citizens groups in the Philippines have also argued that ADB lending for obsolete and uneconomic power projects has discouraged private investment in cleaner, lower-cost generating technologies such as small-scale renewable energy systems (i.e., fuel cells, solar, and biogas systems) that are commercially viable and ideally suited for rural communities and islands (i.e., in Indonesia, Malaysia, Lao PDR, Philippines, and Tibet). They argue that the ADB and other multilateral development banks (MDBs) should direct funds away from the massive-scale power projects that governments have long favoured to the new technologies that provide greater benefits to consumers and the environment.

This assumes that the ADB would do the right thing if only it received proper guidance about which technologies to support. But the real obstacle to productive electricity investments is the institution itself: the ADB is incapable of promoting sound investments in the energy sector (or any other sector) because it is not subject to market discipline or public oversight. Nor does it respect the rights of citizens to decide the fate of resources upon which they depend. The ADB is a government-run institution that borrows money on the good faith and credit of taxpayers in donor nations and lends it to governments in Asia. It is protected from lawsuits and court injunctions so there is no way that citizens can stop its activities or seek compensation for damages caused by projects it has financed. It is not subject to democratic political controls although its investment decisions are often politically motivated and have little to do with economic viability. Its appearance of profitability comes not from its funding of successful projects – which is the measure of any commercial bank’s success – but from the fact that its loans are guaranteed by governments in the North while its borrowers in the South are propped up by an endless stream of new loans.

Unlike a commercial bank, when an ADB project fails, the Bank itself suffers no penalty. Its borrowers, on the other hand, not only have to repay the project loans but they usually borrow more money to do so and also to correct project failures. Taxpayers in the borrowing countries, not only suffer the consequences of the failed project, but eventually they have to pay back all the debts incurred by their governments.

Despite the Bank’s stated commitments to the principles of market economies, private enterprise, and competition, the Bank knows monopolies and cronyism best. It dispenses loans and grants to governments in the South to create friends abroad and in the North to award contracts to favoured companies in order to win votes at home. The borrowing governments, in turn, used ADB money to setup state utilities and a host of other state enterprises. So while the ADB champions the private sector, it has more in common with Asian governments operating centrally planned economies than with private enterprises. It knows nothing of commercial risk-taking, self-reliance, technological innovation or accountability to shareholders. The ADB has promoted electricity investments without responsibility, thus providing a breeding ground for unproductive investments that have destroyed the environment, victimized rural communities, sunk Asian citizens in debt, and cost taxpayers in donor countries money.

Monopoly Power

The utilities the Asian Development Bank financed suffer from the same debilitating condition. Without market discipline or public oversight, utilities across Asia have become bastions of cronyism and inefficiency. Investment decisions were driven by central planning and political patronage rather than the needs of ordinary citizens.

As British energy expert Walt Patterson writes, Third World electricity structures “echoed the political power structure, and the financial implications were likewise profound. Patronage, influence, and corruption figured significantly in staff appointments, investment, and procurement decisions, permits, licences and tariffs. Central-station electricity was a potent lever to steer political processes to the advantage of those in power. In due course the legacy of these beginnings was to prove crippling.”

Insulated from the scrutiny of credit markets, utilities were able to ignore many of the financial and technical risks associated with the investments they undertook, and borrowed excessively from multilateral development banks (MDBs), including the ADB. Because they did not depend on consumers to finance their investment budgets, investment proposals were not subject to local or national scrutiny. With easy access to other people’s money (foreign aid) and captive customers, the utilities became reckless spenders and borrowers. Those responsible for planning and operating the system were insulated from the risks of failure, of ill-advised investments, underperforming technologies, overpriced contracts with suppliers, or system breakdowns.

Unlike a commercial entity, electric utilities were never required to recover costs from consumers and they could always count on taxpayers at home or in donor countries to bail them out. Just like the ADB, if a project failed, the utility and its project managers suffered no penalty. Profitability was not determined by successful investments or customer satisfaction but by the ability of utilities to capture foreign aid and ever larger shares of the state investment budget.

One of the most destructive and discredited policies upon which all MDB lending for the electricity sector rested was the idea that selling electricity for less than its worth was essential for stimulating economic growth and rural development. Keeping rates below the actual cost of production – as a way of stimulating investment and electricity demand – has been the undoing of utilities across North and South America, not just in Asia. While governments saw this as a way of currying favour with business cronies and the general electorate, in the end it thwarted economic efficiency in the electricity sector and undermined the long-term interests of citizens. It encouraged wasteful consumption of electricity which, in turn, drove up demand for new power plants, thus inflicting more environmental damages upon rural communities.

In the name of providing cheap power, governments conferred on the utilities sweeping powers of the state which forced costs and risks onto others. They expropriated resources (i.e. land, water) upon which local communities depended, without local consent or compensation. They destroyed resources and livelihoods with impunity.

Governments used the state utilities as a one-company industrial strategy, promoting industrial expansion in certain regions by offering discount electricity or investing in large-scale power projects to stimulate economic growth and create jobs in others. The ADB would finance large capital-intensive hydro schemes and coal plants that provided ‘cheap’ electricity to consumers, often hundreds of kilometres away, but provided little or no benefit to local communities. Large or politically favoured groups of consumers benefitted from this policy while the needs of the politically weakest or poorest communities were often overlooked. The combined effect of these powers and privileges has been wasteful electricity consumption by some while others went without basic service, environmental degradation, and over-expansion of supply. For a time, the aid-financed utilities were able to conceal their real costs from consumers and taxpayers but inevitably, inefficiency pervaded the utilities and public support for electricity monopolies began to crumble.

Utilities in Crisis

By the late 1980s, after a decade of rapid expansion in many parts of Southeast Asia, state utilities owed billions of dollars to the MDBs, governments were on the hook because they had guaranteed the utilities’ borrowings, electricity rates were not covering costs, and utilities didn’t have the capital needed to upgrade and maintain their systems. The ADB expected the region’s electricity demand to double during the 1990s, requiring an additional 300,000 megawatts – equal to about 500 large power plants – at a cost of roughly $50 billion a year until 2000. China, Malaysia, Philippines and Thailand all had ambitious investment programs but didn’t have the capital reserves they needed to finance the projects themselves, nor were they considered creditworthy by commercial lenders.

The MDBs, by this time, were worried about the excessive borrowing and spending habits of state utilities which put an enormous strain on public finances. The specter of utilities across Asia defaulting on their loan payments loomed large. At the same time, the MDBs were under pressure to launch privatization in borrowing countries when experience in donor countries (i.e., Great Britain and the United States) was demonstrating that the private sector was capable of raising capital for electricity investments and lowering costs.

The Introduction of Private Power

The MDBs began promoting private investment in power plants as a fast way to get new generating capacity “when the lights are going out, incumbent power enterprises are financially unviable, and the public purse is nearly empty,” according to Karl Jechoutek and Ranjit Lamech, energy finance experts at the World Bank.

A typical private power deal would involve a local company, usually set up and owned by foreign investors, that would sign a contract with the host government under which the company would then agree to finance, build, own and operate a power project. The host government in return would agree to pay or guarantee revenues to the local company sufficient to repay the capital costs and provide a reasonable rate of return to the investors. In theory, the government gets the much-needed power project without having to borrow or drain its own limited foreign currency reserves to build it.

Private Profit at Public Risk

So advised by the MDBs, state utilities began licensing private power producers to supply the state-owned grid while keeping their position as monopoly buyers of electricity, controlling all sales, deciding which power producers would have access to the state grid, which fuels and technologies would be used, where, and at what price. To cajole private investment, state utilities accepted certain risks on behalf of the private power producers supplying electricity to the state grid. For example, utilities would often assume “demand risk” which obliged the utilities to pay the private power suppliers even if the utility had no customers or market for the power produced. The National Power Corporation of the Philippines, for example, accepted political risks and foreign currency risk on behalf of private power producers, which meant that the state would have to compensate private investors if any such problems arose.

By assuming financial risks that private investors would not assume, the utilities undermined the very reason for introducing private power in the first place – to cap public debt and force private power producers to take the financial risks instead of governments. Private power deals that were supposed to relieve the host country of many of the liabilities associated with financing and building power projects did just the opposite. As project finance expert Kent Rowey explained in the Financial Times, “The reality is that many of the risks of the project remain with the host government under the support contracts they enter into.”

Utilities allowed private power producers to externalize environmental costs and liabilities, which encouraged investment proposals for oversized power plants that use the cheapest available fuel (usually coal). And because utilities guaranteed revenues and negotiated deals without an open and competitive bidding process, the private power producers had little or no incentive to keep costs down. The first so-called Independent Power Producers (IPPs) in Asia could mark up costs because they didn’t have to worry about finding enough customers to buy their output or the risk that customers would opt for cheaper power elsewhere. They knew that the state utilities would be there to force their uncompetitively priced power onto captive consumers and force other risks and costs onto taxpayers and rural communities. Nor did private investors have to worry about winning public approval for their schemes or controlling pollution because they were supplying electricity to utilities empowered to making decisions without public scrutiny or consent.

Under such terms, the response from the private sector was overwhelming. Giant state-owned utilities and multinational energy companies from the industrialized countries flocked to the region in search of new business opportunities. Thailand, Indonesia, and the Philippines quickly approved a string of oversized and polluting coal-fired plants, to be developed mostly by American and Japanese companies and their local counterparts.

• Before the region’s economic collapse in 1997, the Indonesian utility, PLN, signed 26 over-priced and politically-linked deals with American power companies, including a 4,000 MW coal-fired complex on the East Java coast. Most of these deals were canceled or shelved indefinitely in the wake of the economic crisis.

• The first private power deal approved by EGAT, Thailand’s utility, was the $1.2 billion 1400-MW coal-fired Hin Krut power project to be developed by a politically connected Thai company, Union Power, and two major energy companies from Finland and the United States. The private proponents assumed that the buyer, EGAT, would be able to externalize environmental costs (i.e., pollution of air and water, destruction of marine resources, and local tourist-based economies). But the environmental protests provoked by the project have caused delays and made it difficult for the companies to attract commercial financing. According to Thailand’s National Energy Policy Office, potential investors are also nervous about EGAT’s ability to honour its commitments to buy private power, given its financial woes and the country’s electricity demand slowdown.

• In the Philippines, the National Power Corporation, a state-owned utility, approved a 345-MW hydro scheme to be built by a consortium led by Marubeni of Japan and Sithe Energy of the United States. With guaranteed revenues from the state utility and loans totaling $702 million from Japan’s Export-Import Bank, developers are preparing to build the 195-metre high San Roque dam on Luzon Island. If completed, the dam will destroy the river-based livelihoods of thousands of indigenous Ibaloi people while generating power that is at least twice as expensive as power from combined cycle gas plants. The developers have refused to take responsibility for environmental and other risks (i.e., drought, siltation, and earthquakes) that could cause the project to fail.

• After a decade of excessive borrowing from MDBs, China approved its first privately-financed power project in 1987, a 700-MW coal-fired project in Guangdong province which was developed by the Hong Kong-based company Hopewell (now known as Consolidated Electric Power Asia (CEPA)). CEPA later financed an even larger coal-fired plant (1980 MW) in Guangdong province for $1.87 billion.

Forward to Part 2

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