World Bank guarantees high-risk dam project

Nam Theun 2 power project marks return of World Bank to guarantees for high-risk dam projects

The Nam Theun 2 power project is a build-own-operate-transfer venture which at the expiry of the 31-year concession will be handed over to the government of Lao PDR.

That should present a valuable asset for this landlocked republic; energy cost will be low and the charging system well established.

The PDR's debt/equity commitment so far is only $20 million but whether it will incur liabilities as a stakeholder in the development consortium remains to be seen.

The Nam Theun power project has been assailed by environmental and human rights organisations on the grounds that this huge scheme is being imposed on the people of Laos without their free and informed consent.

This may well be so, but this and many other questions on water resources policy were dealt with in the World Bank strategy document of February 2003.

That paper pointed out that although the World Bank enjoyed recognition as a global leader in integrating social and environmental considerations - as abound in the case of Nam Theun 2 - its involvement in potentially controversial hydraulic infrastructure had declined sharply in recent years.

Nam Theun 2 could certainly be said to mark the re-entry of the World Bank into this field of controversy.

At that time the report of the World Commission on Dams dated November 2000 was still fresh in mind as a milestone in the evolution of dams as a development option.

This proposed a framework for decision-making based on five core values: equity, efficiency, participatory decision-making, sustainability and accountability.

The Commission then provided 26 policy guidelines for implementation of this framework.

The Dams Commission said that public acceptance of key decisions is essential for equitable and sustainable water and energy resources development.

"Public acceptance of key decisions is essential for equitable and sustainable water and energy resources development.

Acceptance", it said, "emerges from recognising rights, addressing risks, and safeguarding the entitlements of all groups of affected people, particularly indigenous and tribal peoples, women and other vulnerable groups." That is clear enough, but the World Bank took the view that adoption of the WCD principle of 'prior informed consent' would amount to a veto right undermining what it regards as the fundamental right of the State to make decisions in the best interests of the community as a whole.

"While there is agreement on the importance of consultation and public acceptance, experience suggests that the multi-stage negotiated approach to project preparation by the World Commission on Dams is not practical and would virtually preclude the construction of any dam." This said, the World Bank made it clear that although it considers the WCD core values and strategic priorities to be appropriate principles and not inconsistent with Bank practice, it did not intend to comply with the 26 guidelines.

"Rather, it will continue to work with borrowers in effective implementation of current World Bank operational policies, which WCD describes as 'the most sophisticated set of policies, operational procedures and guidelines amongst the international donor community.' " Assurances on environmental undertakings But as has often been said about operational procedures and guidelines, it is one thing to have them written down and another to make sure they are followed.

The non-governmental organisations protesting about the decision to go ahead with financing Nam Theun 2 may however find some encouragement in the assurances given by the President of the Asian Development Bank in his report prior to the final decision.

He accepted that a major risk was that the social and environmental mitigation measures might not be implemented effectively by the project proponents.

To ensure compliance with these commitments, the power company has entered into a legal contract with the Lao Government through the concession agreement for the mitigation, compensation and rehabilitation of project-affected people in the event of breaches of these obligations.

He also gave an assurance that that major lessons learned from ADB-funded hydro-electric projects in the Lao PDR have been taken into account in the design of the new project, together with experiences of similar projects in other parts of the world.

Based on these lessons, the promoters have focused their efforts on environmental and social mitigation, offset and compensation procedures.

"The Government and the Nam Theun Power Company have focused their efforts on identifying the potential social and environmental impacts of the project in the downstream areas, and have provided adequate funds for environmental mitigation and social development programs." ADB has also promised to provide assistance in remedying the organisational weaknesses of Electricite de Laos to "streamline the independent power producer development framework that will facilitate and promote transparent private participation in the power sector." The Nam Theun decision is also a reminder of the World Bank's declaration as a key aspect of its water resources strategy, that far from being 'a reluctant, unpredictable and expensive partner', it was determined to re-engage with high-reward/high risk hydraulic infrastructure, using a more effective business model, the essence of which is to put development impact first.

The realisation of this new business model, where the private sector marshals the funds and the public sector provides the risk guarantees, is exemplified by the Nam Theun 2 project.

If all the promises about resettlement and compensation are kept, this should turn out to be an efficient way of developing the water resources of the Mekong Valley.

It seems somewhat ironic that the 'new business model' involves a meeting of capital funding power on one side and Marxist aspirations on the other in the middle of the Mekong River.

This is the 'delivery point' at which the 500 KV power lines from Laos and Thailand are destined to join in a new kind of public private partnership.

Low cost generation for Thailand Some brief details of the hydro-electric project: it is a 1070 MW trans-basin diversion power plant in Central Laos; the six-year construction period will involve formation of a 450 square km reservoir on the Nakia Plateau, capacity 3,500 million cu m.; the 39 m high Nakia Dam will close the river on the north-west side of the plateau.

The powerhouse containing four 250 MW Francis turbines will be located at a point below the plateau providing 350 m head difference.

The regulating pond will be sited below that, and a 2.7 km channel built to carry water from the regulating pond to the Xe Bang Fai river basin.

Export of power to Thailand is expected to be in the region of 5,300 gigawatt hours; between 200 and 300 gigawatts will be available for consumers in the Lao PDR.

The power purchase agreement between NTPC and the Electricity Generation Authority of Thailand says that due to the size of the NT2 reservoir, the company will store in the reservoir the energy already declared and made available to EGAT, but not dispatched by EGAT.

"Although certain limitations shall apply in the case of spillage, this obligation on NTPC allows EGAT to transfer water/energy from the low demand and generation cost period (typically November, December, January) to the high demand and generation cost period (typically March, April, May).

"Therefore, Nam Theun 2 Project will significantly contribute to one of the main objectives of any utility, i.e keeping the generation cost as low as possible.".

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