(October 29, 2008) Sinohydro, the company that helped build China’s massive Three Gorges dam, has requested political risk insurance from the World Bank’s investment guarantee agency (MIGA) for the Nam Ngum 5 hydro project it is building in neighbouring Lao PDR.

In an email to Probe International, MIGA’s lead operations officer Judith Pearce confirmed that Sinohydro applied for political risk insurance last year and that a decision from MIGA’s Board of Directors is expected soon.

MIGA will not disclose the amount Sinohydro wants guaranteed or the type of coverage until after the contract is signed, Pearce said.

According to its official web site, MIGA provides risk insurance for foreign investors in developing countries “to protect them in the event of breach of contract, currency transfer risks, war and civil disturbance, and expropriation.”

Sinohydro began work on the US$200 million project in April of this year, with financing from Sinohydro ($54 million), Bank of China ($140 million) and Laos’ national utility, Electricité du Laos ($6 million).

The investment is part of China’s “Going Out” policy which encourages state companies to build infrastructure in developing countries with financing from China’s export credit agency and banks.  In all likelihood, Sinohydro has negotiated a guaranteed selling price for its electricity, but exactly how much the company expects to earn from the project is unclear as no details have been released.

Despite Laos’ vast untapped hydro potential (its rivers contribute about 35 percent of the Mekong’s total annual flow) and the government’s enthusiasm for public-private partnerships in large-scale hydro development, commercial lenders have shown reluctance to risk large amounts of capital on dams there.

No wonder.  Before hydro developers can approach commercial lenders, they need a power purchase agreement in hand from a creditworthy buyer in the nearest available market. In Lao PDR, the majority of its six million people are subsistence farmers so there’s no domestic market for large amounts of hydropower. Meanwhile, exporting power to neighbouring Thailand or Vietnam is proving commercially and politically risky.

Then there are the financial risks peculiar to Laos’ ‘formerly communist’ regime: private ownership of land and other resources is not allowed which means that developers have to set up joint venture companies with the government as part owner. Project revenue and management responsibilities are then shared between the new company and the government-owned utility, Electricité du Laos, which is neither creditworthy nor transparent in its management or operations.

So even though Nam Ngum 5 is a small project by Sinohydro’s standards and its output is intended for the local market not export, Sinohydro had to create a joint venture company with EdL as a 15 percent stakeholder. Under a 25-year concession agreement, the Nam Ngum 5 Power Company will build and operate the dam and sell its output to EdL. After the concession period expires, the power plant will be transferred back to the Lao government.

MIGA’s role, in this context, is much more a political fixer than a political risk insurer. While no final decision has been made by MIGA’s Board of Directors yet, the agency’s staff have assumed the role of project coordinator and public liaison, helping prepare the dam’s social and environmental impact assessment documents for approval by MIGA’s Board and arranging public “stakeholder” meetings in Vientiane.

So, in addition to protecting Sinohydro from breach of contract and political upheaval (and forcing Laotians to pay in that event), MIGA is arranging for the Lao government to assume responsibility for certain costs of the dam, particularly compensation and environmental mitigation. Thanks to MIGA, Sinohydro will get to keep most of the dam’s revenue without paying all the dam’s costs.

Nobody knows for sure how much such arrangements will eventually cost the Lao government and its citizens because the detailed cost – and risk-sharing arrangements – are kept under wraps. In the past, the Lao government has underestimated the environmental damage caused by its hydro ventures and failed to provide affected people with fair compensation for their losses.

At the recent Nam Ngum 5 workshop, organized by MIGA and the Lao government, affected villagers said they welcomed the project but wanted compensation “before water floods their farmland” and funding for alternative livelihood training to improve their standard of living. An estimated 49 families will lose their paddy fields to the dam’s reservoir, according to the project’s environmental and social impact assessment.

With Nam Ngum 5 under construction on a Mekong tributary, Sinohydro has turned its sights to damming the lower Mekong itself, which is shared by Lao PDR, Burma, Thailand, Cambodia and Vietnam.

Together with China National Electronics Export and Import Company, Sinohydro is conducting a feasibility study for Laos’ first mainstream Mekong dam, the 1,320-MW Pak Lay project.

Pak Lay is part of a nine-dam cascade planned for the lower Mekong by the UN-funded Mekong Committee back in the 1950s (the Committee was reconstituted as the Mekong River Commission in 1995). The plans were shelved due to public opposition in Thailand following the release of a Mekong Committee report (prepared by Canadian and French hydro consultants) which estimated the dams would displace nearly 60,000 people. Now, the plan’s revival by Chinese dam developers has ignited a new round of protests from environmental groups and local communities in the lower Mekong countries. China’s “Going Out” policy is quickly leading to public demands that Chinese dam builders go home.

Backed to the hilt by the Chinese government, few expected Sinohydro or any of China’s state-backed hydro developers to use the deep pockets of Western government-backed financing institutions such as MIGA.

The company’s reason for doing so in the Mekong region became clearer at a hydropower conference in Vientiane last month. At the conference, a spokesperson from Sinohydro welcomed MIGA involvement in mainstream hydro projects, saying the agency would bring “added value” in the form of improved cooperation with governments, transparency, public monitoring, and confidence for project financiers. The company’s representative suggested MIGA could help resolve legal disputes between power purchasers and project developers. And as for environmental and social issues, “always a challenge to developers,” Sinohydro acknowledged the need for government and MIGA involvement. The opportunity to pass responsibility for thorny social and environmental issues on to MIGA may well be the main reason for Sinohydro’s new relationship with the agency.

In recent years, Sinohydro has lined up billions of dollars worth of infrastructure contracts in developing countries, including some of the world’s worst conflict zones, namely the Sudan, the Congo and Burma. Wherever citizens are rallying against Sinohydro investment, MIGA could provide a convenient front office to deflect criticism and responsibility.

Patricia Adams & Grainne Ryder, October 29, 2008